Jim Flaherty's push to erase the deficit is getting some help from an improving economy: Forecasters told Canada's finance minister he can expect higher revenues over the coming years.
The minister met with private sector economists Monday as he prepares to deliver his 2012 budget on March 29. The government uses an average forecast from the private sector as a foundation for its growth numbers.
The major concerns of economists throughout 2011 – including an unruly Greek default and a double-dip recession in the U.S. – have faded considerably.
"Most of us are upgrading our forecasts for 2012 for Canada," said Stéfane Marion, National Bank's chief economist.
For Mr. Flaherty's purposes, higher assumptions for economic growth mean he can book billions in additional revenue over the coming years. Toronto-Dominion Bank deputy chief economist Derek Burleton estimates that Ottawa could have more than $3-billion a year in additional annual revenue within a couple of years just from the slight upward revisions economists are now making to their growth forecasts.
This comes at a time when Mr. Flaherty's budget is expected to show how Ottawa will cut back spending by at least $4-billion a year. That combination of lower spending and higher revenue – combined with lower debt servicing costs thanks to lower-than-expected interest rates – means the federal deficit is likely to shrink faster than expected.
There are already signs this is happening. The government's spending requests to Parliament suggest total spending for the current year could be down 3 per cent from the year before. Meanwhile monthly deficit tracking shows Ottawa is on track to post a deficit for 2011-12 of about $25-billion – well under the $31-billion Mr. Flaherty estimated in November.
"I'm happy that the deficit looks like it's going to be lower this year," said Mr. Flaherty. "And I want to make sure it's lower next year. And then within the next few years a balanced budget. And that gives us scope then to reduce taxes more, to pay down the public debt more and that's what makes Canada look, quite frankly, so good in the world."
Mr. Flaherty indicated that there was no consensus in the room when he asked economists about Canada's housing market.
"There's a divergence of views," he said. "So we will see over time. There has been some moderation in the housing market. I remain concerned about the condo market, quite frankly. Interest rates are relatively low so, again, I encourage Canadians to be careful in the amount of debt they take on in terms of residential mortgages because rates will go up some day."
Mr. Burleton, as well as Royal Bank of Canada chief economist Craig Wright, say the government should consider lowering the maximum amortization period for government-insured mortgages to 25 years from 30.
"Bringing back mortgage regulations closer to where they were before they were loosened initially in 2006 I don't think would be a bad thing," said Mr. Burleton.
No average GDP forecast was released Monday because the economists said they were taking a few extra days to incorporate Friday's GDP figures for the final quarter of 2011.
CIBC World Markets chief economist Avery Shenfeld said the new average is likely to be a few decimal points higher than the average used for Ottawa's November fiscal update. At that point, the average estimate was for 2.1-per-cent growth in real gross domestic product for 2012.
"I think it's fair to say that some of the risks we were worried about last year don't seem quite as shocking as we go into the current year," Mr. Shenfeld said.