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Slowing Canada Economy May Cut Flaherty’s Fiscal Cushion

August 31, 2012

Canada’s Slowing Economy May Erode Flaherty’s Fiscal Cushion

Canadian Finance Minister Jim Flaherty’s March 29 fiscal plan, which forecast surpluses beginning in 2015, projected nominal GDP growth of 4.6 percent this year. Photographer: Simon Dawson/Bloomberg

Canadian Finance Minister Jim Flaherty may be losing the cushion he built into his fiscal plan as the world’s 11th-largest economy slows.

Flaherty’s department said today that it may need to revise its budget outlook amid risks to the global recovery, even as the latest data suggest the government is on track.

“Recent economic developments suggest that there are downside risks to the fiscal outlook,” the department said in a document published today that showed the federal deficit in the first three months of the fiscal year that began in April fell 53 percent to C$1.98 billion ($2.01 billion).

Statistics Canada today released second-quarter gross domestic product figures today that show the country’s economy stalled at a 1.8 percent annual rate. Flaherty is slated to speak to reporters at 9:30 a.m. in Toronto today.

The slowing growth, coming after negative economic reports that brought the Citigroup Economic Surprise Index for Canada to its lowest since 2009, may crimp government revenue and undermine Flaherty’s ability to come in below his target for a C$21.1 billion deficit this fiscal year.

“It’s unlikely they are going to outperform in a big way,” said Doug Porter, deputy chief economist at BMO Capital Markets in Toronto. “As recently as three or four months ago it did look like as if there was a big possibility” that Canada would “seriously” beat this year’s deficit target, he said.

Slowing Growth

Flaherty’s March 29 fiscal plan, which forecast surpluses beginning in 2015, projected nominal GDP growth of 4.6 percent this year. Nominal GDP is a better predictor of the tax base and revenue because it includes changes in prices. The budget built in a C$3 billion cushion for revenue by assuming output would be about C$20 billion below the consensus of private-sector forecasts.

That assumption now seems to be closer to reality than the initial growth projections, economists say. Toronto-Dominion Bank (TD) deputy chief economist Derek Burleton said he’s forecasting about 3.5 percent growth in nominal GDP this year, while Royal Bank of Canada projects about 3.4 percent this year and Bank of Montreal (BMO)’s outlook is 3.7 percent.

That’s down from growth of 5.9 percent in 2011, and reflects in part falling prices for the country’s commodities. The Bank of Canada Commodity Average Price Index has averaged 638.18 this year, 5.1 percent lower than the 2011 average.

Borrowing Costs

On the positive side for the government’s balance sheet, borrowing costs are below those forecast in the budget, helping offset the impact of any slowdown in revenue. Ten-year government bond yields have averaged 1.9 percent this year, compared with budget forecasts for an average 2.2 percent in 2012. A one percentage-point increase in borrowing costs would raise debt charges by about C$1.7 billion and raise the deficit by C$600 million, the 2012 budget estimated.

Monthly budget data has also been showing buoyant revenue growth, at least so far this fiscal year. Federal government receipts in the first three months of the year that began in April are up 4.7 percent, led by higher employment insurance premiums and corporate income taxes.

“It’s not clear at this stage how they all net out,’ Burleton said in a telephone interview. ‘‘Clearly from an economic perspective, we are looking at a weaker performance compared to what we had expected earlier this year.”

Flaherty is due to update his fiscal projections over the next months in his traditional fall economic update.

To contact the reporter on this story: Theophilos Argitis in Ottawa at

To contact the editor responsible for this story: Chris Wellisz at

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