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Finance Minister Jim Flaherty (Adrian Wyld)
Finance Minister Jim Flaherty (Adrian Wyld)

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Jim Flaherty could miss target to balance budget by two years Add to ...

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Flaherty's target Canada's Finance Minister Jim Flaherty could miss his target for a balanced budget by two years, Toronto-Dominion Bank says.

But TD economists Derek Burleton and Sonya Gulati rule out the need for more restraint measures because deficits would be small in the final two years and the markets should take solace that a "medium term plan" is still in place.

Mr. Flaherty himself hinted earlier this week that he could delay his target of 2014-2015 when he delivers his fall update, though he wouldn't pinned down.

"Unless new fiscal restraint measures are announced and in the absence of any new fiscal restraint measures, there is a risk that the federal government will return to budgetary balance in 2016-17, two years later than previously estimated," Mr. Burleton and Ms. Gulati said in a report today that bases their projection on economic forecasts that have dimmed of late.

"However, with small deficits forecast in the last two years of the revised timetable (0.1 per cent to 0.3 per cent of GDP), additional fiscal restraint, above what has already been announced, need not be pursued."

The economists project that economic growth this year will be 1.6 percentage points below the last budget forecast, which would mean $3-billion less for the government. They see that reality-to-forecast gap narrowing in the 2013-2015 period, to about just 0.2 to 0.4 of a percentage point.

"Because each revenue hit is cumulative in nature, an $8-billion revenue wedge is ultimately created by 2015-2016," the economists said.

They look at the spending side of the ledger, along with deficit service savings from lower interest rates, and come to the conclusion for the two-year time lag.

"The extended deficit profile brings with it greater public debt burdens $5.6-billion more debt over five years) than originally forecast," they added.

The euro deal Will the euro zone deal be enough?

Many questions remain unanswered today, but for now the embattled leaders of the monetary union appear to have taken several steps in the right direction to easing the debt crisis that has plagued the region for about two years. Certainly the markets think so.

Leaders of the 17-member euro zone forged a broad agreement after a marathon session that ended in the early hours, as The Globe and Mail's Eric Reguly reports. The three main pieces of the package would beef up the union's bailout fund, force the region's banks to shore up their capital to the tune of €106-billion, and see the private holders of Greek debt voluntarily take a 50-per-cent hit, with the euro zone kicking in €30-billion to help out.

"The question is whether it will be enough in the long term, or whether it has merely put off the day of reckoning, for a little while longer," said CMC Markets analyst Michael Hewson. "While we now have some numbers to go on it will be all rather pointless of leaders don’t find a way to stimulate growth and we still have the question of Italy’s finances."

It is, of course, impossible to tell where all of this leads. As senior currency strategist Elsa Lignos of RBC in London put it, Europe's debt crisis is by no means solved.

First, the plan aims to bring Greece's debt-to-GDP ratio to 120 per cent by 2020, down from 160 per cent. "In practice that will be hugely dependent on the path of growth," Ms. Lignos said of the Greek economy, which is deep in recession.

As for the debtholders, they're looking at a writedown of €100-billion, and virtually all have to agree. "If some bondholders hold out we may need to see more than just the €30-billion sweetener of public euro zone money to get everyone on board," Ms. Lignos said.

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