Bloomberg News

Flaherty Will Update Canada Budget Tomorrow as Revenue Slows

November 16, 2011

(Updates with possible central bank mandate in fifth paragraph.)

Nov. 7 (Bloomberg) -- Canadian Finance Minister Jim Flaherty may say he won’t be able to fulfill his plan to balance the budget within three years in an update of the government’s fiscal plan to be released tomorrow.

Flaherty will update his projections at a luncheon speech to the Calgary Chamber of Commerce, according to a person familiar with the plan who spoke on condition of anonymity because the event has not yet been publicly announced.

Flaherty said Oct. 25 he will cut growth projections to reflect a dimming global economic output when he unveils the annual update to his fiscal plan, which usually happens in October or November. The government may be reluctant to make up revenue losses through new spending cuts at a time when the world economy is slowing, said Doug Porter of Bank of Montreal’s capital markets unit in Toronto.

Meeting the timetable to balance the budget in the fiscal year beginning April 2014 is “still doable, it’s just whether it’s the right course of action,” Porter, deputy chief economist at BMO, said in a telephone interview. “I don’t think that should necessarily be their absolute guiding star at this point to hit the balanced budget target by 2014 come heck or high water.”

Flaherty may also use the fiscal update to extend the Bank of Canada’s inflation-control mandate. Canadian governments used fiscal updates to renew the central bank’s inflation mandate in 2006 and 2001. The current Bank of Canada policy agreement expires at the end of this year.

Election Promise

Flaherty’s governing Conservatives promised to accelerate Canada’s return to surplus during the campaign for May 2 elections that returned Prime Minister Stephen Harper to power with his first parliamentary majority.

The change in growth outlook won’t affect the government’s budget projections in the “near-term,” Porter said.

Canada’s budget deficit was a smaller-than-forecast C$33.4 billion ($32.9 billion) in the year ended March 31, C$2.8 billion less than predicted in the June budget. The deficit in the first five months of the current fiscal year narrowed to C$10.7 billion from C$13.5 billion.

“The near-term targets are still more or less on course even though the growth outlook has taken a step back,” Porter said.

While Flaherty has declined to say how slowing growth will influence his plans to balance the budget by 2014, he has said the government still aims to balance the budget “in the medium term.”

‘Lack of Confidence’

Harper acknowledged last week that the European debt crisis has begun to impact the country’s growth outlook, citing a 54,000 drop in employment during October.

“It’s a reflection of the lack of confidence that has been spreading in world markets as a consequence of the European debt crisis,” Harper told reporters Nov. 4 in Cannes, France, where he attended a meeting of leaders from Group of 20 countries. “This is not by any way unique to Canada.”

Canadian data have shown a rebound, accompanied by languid job growth, following a contraction in the second quarter.

The country’s employers have added a net 8,520 jobs over the past four months, even as output data show the economy may have grown at a quarterly rate of more than 2.5 percent in the third quarter.

Less Revenue

Flaherty’s office released estimates Oct. 25 showing that economists forecast Canada’s economy will generate C$83 billion less in output between 2011 and 2015 than the government projected in June. That may reduce revenue by about C$12 billion over the period, according to a calculation based on government figures from the June budget that shows the government expects revenue to be about 15 percent of nominal output over that time.

Canada’s federal government will generate C$8 billion ($8.1 billion) less in revenue through the fiscal year that ends in March 2016, according to an Oct. 27 report today by Toronto- Dominion Bank economists Derek Burleton and Sonya Gulati. That means the country won’t run a surplus until the 2016-2017 budget year without additional measures, and hold C$5.6 billion more debt than planned over five years, it said.

In his June budget, Flaherty projected deficits of C$32.3 billion in the current year, shrinking to C$18.4 billion in 2012-13 and C$7.4 billion in 2013-14, before swinging to a C$3.7 billion surplus in 2014-15, once a review of government spending is completed.

--Editors: Paul Badertscher, Vince Golle

To contact the reporter on this story: Theophilos Argitis in Ottawa at targitis@bloomberg.net

To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net; David Scanlan at dscanlan@bloomberg.net.


American Apparel's Future
LIMITED-TIME OFFER SUBSCRIBE NOW

(enter your email)
(enter up to 5 email addresses, separated by commas)

Max 250 characters

 
blog comments powered by Disqus