BUDGET 2011: Economy pours tax dollars into rosy budget blueprint

The Canadian Press ~ OBJ
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The economy is coming to the rescue of Jim Flaherty's wishing-and-hoping balanced-budget plan.

 

When the finance minister announced last March he would balance the budget in five years, there were plenty of skeptics, notably Parliamentary Budget Officer Kevin Page.

How is a minority government going to hold spending growth to two per cent, which, minus inflation, meant zero, for one, then two, then three, then four, then five years without blinking?

This March, Flaherty is back with the same projections _ only improved, despite stocking Tuesday's budget with a pot-pourri of tempting sweets designed to get the NDP to come into the candy store.

Now not only does Flaherty envision his red ink painted black in 2015-16, by then it will be an even bigger surplus, he says. For all intents and purposes, he will achieve balance a year before.

To do so, the government is counting on an infusion of tax cash from the economic recovery, which has been progressing better than was expected last year.

That has enabled Ottawa to reduce this concluding year's deficit from a previously projected $45.4 billion to $40.4, and many think it will be lower still.

Counting the current fiscal year, the government figures to pocket $19.1 billion more during the deficit elimination phase than it had expected in October. And this is after Flaherty built in a $7.5-billion prudence factor in case the economy doesn't perform up to current expectations.

So cautious that following this year, Ottawa is forecasting slower nominal gross domestic product growth four years running than it had last March.

Flaherty described the budget as a ``balanced'' blueprint that sprinkles targeted relief to people who most need it, but still stays true to his deficit reduction schedule.

"Fundamentally we stay on track, we make sure we get back to a balanced budget to protect our country,'' he told reporters. ``We want to be in good shape when the next crisis comes, just like we were in good shape when the last crisis came."

Flaherty believes there's reason to be cautious, as do economists. The U.S. recovery could vanish as soon as Washington stops pumping money into it; Europe is just pushing its debt crisis down the road, not solving it; and there remains a crisis in the Middle East and destruction in Japan.

The budget document warns that any hiccup in economic performance can throw the numbers out of whack.

As the budget shows, Canada may never recover the lost $100 billion in output from the recession. Analyst projections show that five years out, the economy will still be $105 billion smaller than it would have been had the slump not occurred.

Of course, the opposite is equally true. A bigger economic bounce pays dividends year after year.

The government's rosier assumptions stem from the fact nominal growth, which includes inflation and price effects from higher commodity-export income, expanded by 6.2 per cent last year and is projected to increase by 5.8 per cent this year. Both are significantly higher than last budget's projections.

"That better starting point gave them the manoeuvring room to introduce the new measures," said Bank of Montreal deputy chief economist Douglas Porter.

"The numbers are not unreasonable."

Analysts caution that staying the course, as Flaherty continually pledges, is easier said than done. The Harper government has still set itself an ambitious target of keeping spending growth to two per cent. Given that spending grew on average six per cent before the downturn, it represents real restraint.

As well, Ottawa projects revenues from personal taxes to rise by an average six per cent over the next five years, ahead of nominal GDP growth. It doesn't usually happen that way.

But then the government has also built in a prudence factor, and the economy could beat the modest targets the government has set.

"There are high side surprises. If we had another commodities boom, some of these nominal GDP numbers would look quite modest," Porter notes.

And Flaherty has yet to calculate a contribution from the new Strategic and Operating Review process that could yield the government billions in savings.

Thanks to the high-side economic surprise of the last year, what looked like wishing and hoping last March appears more plausible 12 months later.

 

Organizations: NDP, Bank of Montreal deputy chief

Geographic location: Ottawa, U.S., Washington Europe Middle East Japan Canada

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  • daveM
    March 22, 2011 - 18:45

    Mr Flaherty is caught between many needs, a budget for such a diverse country is not an easy assignment.. As it appears that the government will fall, this was a bit of wasted effort.