Canada’s revenue outlook has deteriorated since Finance Minister Jim Flaherty updated his fiscal plan in November amid signs the economy has slowed, making it more difficult to bring the budget into balance, a person with direct knowledge of the government’s budget planning said.
Budget planners are concerned that weaker revenue may outpace Flaherty’s ability to offset it through accelerated spending cuts, especially since the government pledged not to curb transfers to individuals and provinces, the person said on condition they not be identified because they aren’t authorized to speak to the media on the subject. Still, the goal remains to balance the budget by 2015, the person said.
Canada’s economy probably had its worst six-month performance since the end of the 2009 recession in the second half of last year, as exports fell and uncertainty about the global expansion prompted businesses to curb spending, leading economists to scale back their expectations for 2013.
“Tax revenues are just not going to be maintaining the pace you would have expected just six months ago,” said David Watt, chief economist at HSBC Bank Canada.
Flaherty, seeking to return the country to surpluses while ensuring the economy isn’t hurt by fiscal tightening, already scaled back revenue projections in a November budget update by C$7 billion ($7.1 billion) for the next fiscal year and by C$36 billion over five years, citing lower commodity prices.
In that update, growth projections for 2013 were cut to 2 percent from a March forecast of 2.4 percent when the budget for the fiscal year beginning in April was released. That 2 percent now looks optimistic.
Growth in 2013 will probably be closer to 1.7 percent, according to the median of the forecasts of economists at six Canadian banks: Toronto-Dominion Bank (TD), Canadian Imperial Bank of Commerce, Bank of Nova Scotia, BMO Capital Markets, Royal Bank of Canada and HSBC Canada.
A 0.3 percentage-point reduction in 2013 growth projections may create an additional budget shortfall of more than C$1 billion in the next fiscal year and almost C$4 billion over three years, according to Bloomberg calculations based on a formula provided by the finance department in its last update. A one-year 1 percentage-point reduction in growth narrows the budget balance by C$3.9 billion in the first year and C$12.8 billion over three years, according to that formula.
“Growth has not been as firm as they had been expecting,” Watt said. “As a result, the fiscal situation has been a bit more of a challenge.”
Flaherty has said he will balance the budget before the next federal election, expected in 2015, by cutting departmental expenses and forgoing new spending. A government pledge not to raise taxes or cut transfers to individuals and provinces is handcuffing the government’s ability to meet that goal as revenue wanes.
Direct program spending, which excludes transfers and makes up just under 50 percent of federal government spending, is projected to decline to C$118.9 billion in the fiscal year that begins April 1, down from C$120.8 billion projected in the 2012-13 fiscal year, then remain little changed through 2017, according to the November fiscal update. As a share of GDP, direct program expenses will decline to 5.4 percent by 2017, the lowest since at least 1967, from 6.7 percent this year.
The finance department also scaled back its revenue assumptions in the update, after final figures for the fiscal 2011-12 showed the government’s revenue as a share of the economy shrank to its lowest in at least 45 years.
Canada now projects total tax revenue as a share of GDP will average 14.3 percent over the next five years, ranging from 14 percent in the current year to as high as 14.4 percent in 2015. That ratio has averaged about 15.5 percent over the previous 10 years.
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