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Joe Oliver insists that Canada's economic downturn (just try to get him to say "recession") hasn't derailed his plans for a budget surplus this fiscal year. His own budget suggests otherwise.

The federal Finance Minister said this week that despite the mounting evidence that the country's economic slump has been deeper and longer than the government anticipated in its spring budget, the projected $1.4-billion surplus for fiscal 2015-16 is not in jeopardy. Even though many economists now believe Canada slipped into a recession in the first half of the year, Mr. Oliver is confident that a rebound is coming in the second half.

"Virtually all the economists that I've talked to see positive growth for the Canadian economy for the year over all," he said.

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But as the budget documents show, the projected surplus isn't based on merely "positive" growth for 2015. The budget's financial calculations were based on the average private-sector forecast of 2-per-cent growth in gross domestic product. With GDP having declined in the first quarter, and a growing number of private-sector economists now saying it probably shrank again in the second quarter, the economy will have to do more than simply reverse that in the second half of the year to meet that budget assumption. It will have to be positively booming – something in the order of a 4-per-cent annualized pace.

The phrase "fat chance" comes to mind.

Indeed, as the second-quarter outcome sinks deeper into the quicksand with each economic release (the latest being this week's report of a near-record trade deficit for May), economic forecasters have been cutting their growth projections for the full year. Even before the poor trade report, Toronto-Dominion Bank predicted the economy would expand by just 1.2 per cent this year. After the trade data came out, Capital Economics economist David Madani said Canada would be "lucky" to grow by 1 per cent.

What would growth a full percentage point below the budget assumption do to Ottawa's finances? Well, conveniently, the budget documents tell us that, too. In a section outlining the "sensitivities" of the budget estimates to changes in key underlying economic conditions, the government estimated that a one-percentage-point drop in real GDP growth would translate to a $4.1-billion hit to the budget.

That would eat up not only the $1.4-billion projected surplus but also the $1-billion set aside for "contingencies," with room to spare. Unless the second half of the year is much better than almost anyone expects, the government's own calculations suggest that this surplus is well on its way to becoming a deficit.

Of course, Mr. Oliver could defend the government's coveted balanced budget by tightening its spending belt further. It's a move few economists would cheer, as a decline in government spending would further slow the already struggling economy.

Perhaps Mr. Oliver is banking on the same thing the financial markets increasingly are: that the Bank of Canada will ride to the rescue. The Harper government has been criticized in the past for restraining its contribution to the country's economic activity in order to bring its budget into balance while leaving it to the central bank to keep interest rates low to keep the economy afloat. Another rate cut from the central bank – which the bond market is now pricing in as highly likely before the end of the summer and perhaps as early as next week – would hand a lifeline to Mr. Oliver's surplus.

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Based on the sensitivities outlined in the budget, a half-percentage-point cut in interest rates would result in direct savings to the government of about $850-million on debt-servicing costs alone. More significantly, any economic boost derived from the stimulus of lower rates would feed into government revenues. If rate cuts were to help lift GDP growth for the year by, say, half a percentage point, that would juice the budget balance to the tune of about $2-billion. Clearly, another rate cut could restore meaningful wiggle room to Mr. Oliver's budget.

From a political standpoint, if not an economic one, Mr. Oliver's nothing-has-changed line is certainly the more attractive message for the ruling Conservatives, who would rather not see their economic and fiscal record undermined just as they head into a fall election. But with that election slated for Oct. 19 (though the government has the option to call it sooner), it will be hard to keep up the act.

Statistics Canada will release the (likely poor) second-quarter GDP figures on Sept. 1. Mr. Oliver can cling to his faith in an economic rebound in the second half of the year; but by mid-October we will have also seen the GDP for July, trade and manufacturing figures to the end of August and employment data for the entire third quarter.

So Canadians will have a pretty good idea whether the economy is bouncing back by the time they arrive at the polls. Unless Mr. Oliver has a lot of luck on his side, neither the voters nor his own budget bean counters will love what they see.

Editor's Note: A previous version of this chart compared TD's second quarter GDP estimate of -0.6 per cent annualized versus previous quarters that were not annualized, resulting in an inaccurate comparison. This version has been corrected.

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