Not any more

Ottawa targets 2016 for return to surplus

In Canada on October 12, 2010 at 14:05

OTTAWA — Ottawa revised downward expectations for tax revenue over the next four years based on lower GDP growth and “elevated” near-term risks posed by an uncertain global economy, the federal government said in a fiscal update released Tuesday.

As a result, the government does not anticipate returning to surplus until 2016 — the first time the Conservatives have put a date on the emergence of a balanced budget.

The update reflected a cautious tone about the economy, as expressed by Finance Minister Jim Flaherty last week when he warned Canadians would have to adjust their expectations because the “boom times were over” and the outlook remained “highly uncertain.”

The update showed Ottawa posted a budget deficit for the year just past of $55.6-billion, slightly higher than the anticipated $53.8-billion shortfall due to one-time charges related to transfers to provinces implementing a harmonized sales tax. The budget shortfall is set to fall to $45.4-billion in 2010-11 and to $29.8-billion in the fiscal year after that, but those estimates are slightly higher than what was projected in this year’s budget.

“The near-term global economic outlook remains highly uncertain, with the balance of risks tilted to the downside … particularly in the near-term,” the Department of Finance said in documents released prior to a speech to be delivered by Mr. Flaherty in Mississauga, Ont., before a Chinese business association.

“As a result, the government has judged it appropriate to adjust downward” the outlook for growth in nominal GDP, considered the tax base from which governments collect revenue.

According to Finance documents, the government has assumed, for planning purposes, that the level of nominal GDP will be nearly $40-billion lower through 2015 compared to what private-sector economists have estimated. (Nominal GDP refers to an amount of economic activity that has not been adjusted for inflation.)

The update indicates real GDP grew by a meagre 1.8% annualized for the three-month period ended Sept. 30, and is set to expand by 2.5% in the final quarter of 2010 and “remain moderate” through the first half of 2011. Economic activity would be stronger in 2010, at 3%, than envisaged but then drop to 2.5% expansion in 2011 — below the 3.2% advance built into Budget 2010 assumptions — and stay below a 3% annual rate through 2015.

Nevertheless, Finance said the fiscal projections set out in the update indicate the Conservative government’s deficit-reduction plan “is on track.”

Despite renewed economic weakness, Mr. Flaherty has reiterated time and again his government’s intention to stay the course as outlined in the last budget, which would see the two-year $48-billion stimulus program cease as of this coming March 31 and the government embark on a plan to curb spending growth.

But in recent weeks, the federal government — in recognition of the weakening global recovery — has eased on certain measures. It said some stimulus funding would flow after March 31 for infrastructure projects that are near completion. Plus, it capped the planned growth in Employment Insurance premiums, which would cost Ottawa $5.3-billion in lost revenue over the next four fiscal years.

Increases in EI, coupled with curbs in program spending, are the key elements of the government’s deficit-reduction scheme. The update indicates the program spending estimates in the budget remain largely intact.

The update emerges as the Canadian and global recovery comes to a crossroads. Canadian growth has slowed considerably after strong gains early this year on weaker demand from the United States — whose economy is in such a tailspin that it may prompt the Federal Reserve to pump more liquidity in its economy through asset purchases.

Job growth has tapered off with September data indicating the economy shed 6,600 jobs in the month. September marked the second time in three months the economy reported monthly net job losses, following an amazing six-month streak beginning last January in which monthly job growth averaged 51,000. A total 19,900 jobs were created for the three-month period ended Sept. 30.

Exacerbating matters is the recent outbreak of a so-called currency war, in which advanced and emerging markets have moved to cap the appreciation in their respective currencies in an effort to keep exports competitive. This will keep the value of the Canadian dollar elevated and make it more difficult for domestic firms to sell their goods and services abroad.

Financial Post

This is rich!

OCC

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