Canada’s surplus erodes
Balanced budget under threat
OTTAWA — Joe Oliver’s promise of a balanced budget is under threat as Canada’s economy shrinks, putting into question one of the Conservative government’s key arguments in the run-up to an October election.
Over the past week, the finance minister reiterated a forecast from April’s budget that Canada will post a $1.4-billion surplus in the current fiscal year, which was based on 2015 economic growth of two per cent. Trade Minister Ed Fast echoed that message, saying Thursday the government remains on track.
However the economy has sputtered all year. Four straight months of negative growth and a record cumulative trade deficit prompted private-sector economists and the International Monetary Fund to cut their forecasts. Toronto-Dominion Bank, Bank of America Merrill Lynch, BNP Paribas and Citigroup now say Canada has probably fallen into recession. And jobs numbers released Friday were stagnant.
Western University business professor Mike Moffatt calculates, using government figures, this weakness has turned the slim surplus into a deficit of about $1 billion.
Prime Minister Stephen Harper’s team is nevertheless sticking to its message. “They had made a pledge they were going to be back to surplus before the election,” said David Watt, chief economist at HSBC Holdings in Toronto. “I don’t think they will be dissuaded from that even though the growth numbers don’t really support it.”
The Conservatives have touted strong economic management as one of their main assets and balancing the budget would meet a signature promise to end seven years of deficits. However the Finance Department said in its April budget documents that a one percentage point cut in economic growth over a year would reduce the budget balance by $4.1 billion.
Moffatt said he based his deficit prediction on those sensitivity figures. “Hitting that target is a political decision,” he said of the Conservative surplus projection, adding the government should embrace a deficit to cushion the economy.
“We are going into a recession or are in a recession. Why would we defer spending? That would make it worse,” Moffat said.
Fast disagreed. “Stimulus is not the only way of addressing the situation,” he said. “It is only in the most severe circumstances we would do that.”
The Conservatives have little choice this close to an election but to argue the weakness is triggered by global events, said Nelson Wiseman, who teaches politics at the University of Toronto. The prospect of a deficit and recession comes with the opposition New Democratic Party, which has never formed government, ahead of the Conservatives in opinion polls and the Liberals close behind.
As a result, Harper and his team are now talking up the need for stability. “They want to play to that — ‘Even if things are bad, trust us,’ ” Wiseman said. “They can no longer boast that Canada has done better than any other developed country.”
Oliver’s argument for economic resilience took another hit Thursday from the IMF, which chopped its 2015 Canada growth forecast to 1.5 per cent from an April prediction of 2.2 per cent. The Washington-based group called it a spillover from a quarterly contraction in the U.S., which buys three-quarters of Canada’s exports.
“Now is not the time for risky, high-tax schemes that will stall growth and undermine our financial stability with deficit spending,” Oliver said in a statement Thursday that referenced the IMF forecast. NDP Leader Tom Mulcair is “offering high-tax, high-debt policies which can undermine our credit rating and lead to financial instability,” the finance minister said.
He issued a similar statement Friday after Statistics Canada reported that Canada shed 6,400 jobs in June.
The Bank of Canada may end up offering fresh stimulus at its July 15 meeting, with 14 of 27 economists surveyed by Bloomberg calling as of Friday morning for a quarter-point cut in the key interest rate to 0.5 per cent. Royal Bank of Canada and Bank of Montreal changed their forecasts this week to a cut after Statistics Canada reported that non-energy exports — which bank governor Stephen Poloz is counting on to lead a second-half rebound — dropped in May.
“The oil-price shock is weighing very heavily on the economy,” Dana Peterson, an economist at Citigroup Global Markets in New York, said. She predicts the economy will grow one per cent in 2015, after contracting 0.5 per cent in the second quarter. “That does pose downside risk to the federal government’s budget projections.”
“NOW IS NOT THE TIME FOR RISKY, HIGH-TAX SCHEMES THAT WILL STALL GROWTH AND UNDERMINE OUR FINANCIAL STABILITY WITH DEFICIT SPENDING.”
JOE OLIVER