Ottawa and the provinces will lose a combined $14-billion in government revenue this year as a result of falling oil prices, according to new analysis that comes as the federal Conservatives shift their economic message ahead of Parliament's return next week.
The federal government alone is set to lose $4.3-billion this year, the Conference Board of Canada said in a report Tuesday. The board is among the organizations that provide forecasts to the finance department and its findings add to the growing private sector opinion that Ottawa's return to budget surplus is in jeopardy.
The International Monetary Fund lowered its forecast for global economic growth, helping trigger a 4.7 per cent drop Tuesday in the price of North American crude, which closed at $46.49 (U.S.) a barrel Tuesday. The IMF also cut its forecast for Canada. The Bank of Canada is expected to comment in detail Wednesday on the impact of low oil prices in its quarterly Monetary Policy Report. Analysts suggest the Canadian dollar could sink below 82 cents U.S. depending on what the bank has to say.
The rapidly changing economic picture is also leading to some mixed messages from the Conservative government.
A senior government source, speaking on condition of anonymity, moved Tuesday to play down statements made by Employment Minister Jason Kenney over the weekend. Mr. Kenney had said in media interviews that the government would consider further spending "restraint" in response to lower revenues. He also said the government would not spend what he called a "contingency fund," in reference to the $3-billion downward adjustment Ottawa makes to its revenue forecasts as a form of fiscal prudence.
Since those comments were broadcast Sunday, no minister or government spokesperson has provided on-the-record comment to confirm or contradict Mr. Kenney's remarks. However the source said no cuts are planned and indicated the contingency will be used if necessary. "The contingency is there for unforeseen events," said the source.
The government announced last week that it would not be releasing a federal budget until "at least" April, a move opposition parties have described as a sign of panic from the Conservatives.
The federal government's November fiscal update estimated a $2.9-billion deficit for the current fiscal year and a $1.9-billion surplus in 2015-16, based on the assumption that North American crude prices would remain around $81 (U.S.) a barrel.
Pedro Antunes, the Conference Board's deputy chief economist, is among the private sector economists who say Ottawa will be on the razor's edge of a surplus or deficit in 2015-16.
"It's going to be very close to a zero balance," he said. "It just depends on what assumptions you put in for oil prices."
The report released Tuesday looks at which provinces will gain and which ones will suffer in the new environmentof lower oil prices. It also estimates that North American crude prices will recover to above $60 (U.S.) in the final quarter of the year.
The Conference Board is somewhat more optimistic on oil prices than other forecasters. Its economists said they believe the market has likely hit bottom as producers have already slashed spending on drilling and new projects.
The report forecasts the North American benchmark West Texas Intermediate will climb above $60 (U.S.) by the end of the year – with an average price of $56 per barrel for 2015. That's down from an average of $93.20 last year. Goldman Sachs last week slashed its 2015 oil price forecast to $51.
The report says the Alberta economy could slip into a recession because of falling oil prices, a claim Alberta Premier Jim Prentice has rejected. Saskatchewan and Newfoundland and Labrador – Canada's other significant producing provinces – will also feel the pain because all three collect oil royalties. Ontario and Quebec will benefit the most from weaker oil prices, due in part to stronger U.S. growth and the lower Canadian dollar. But those two central Canadian provinces lack the industrial capacity to fully respond to the improved economic outlook.
Even with declining federal revenue, Ontario Premier Kathleen Wynne said in a speech Tuesday that all governments - including Ottawa - need to spend more on infrastructure. The call comes ahead of next week's gathering of provincial and territorial premiers in Ottawa.
"We are asking the federal government to do more," she said.