Forecast still cautious
Anti-austerity crowd gets a little too vocal in the House of Commons Ottawa plans for risk even as economic recovery brightens
A cautious economic outlook, mindful of risks from the U.S. and Europe, as well as sky-high household debt levels in Canada, is at the bottom of the proposed federal budget.
The government expects to cut the deficit in half by 2013 — well ahead of schedule — and eliminate it by 2016. The annual shortfall between revenue and spending now stands at $21.1 billion.
“It’s a gradualist approach which makes sense in a world economy that is still not what we would like it to be,” said Avery Shenfeld, chief economist at CIBC World Markets.
“Relative to what anybody else is doing, we still come out with flying colours,” Shenfeld added, referring to other developed countries, including the U.S. struggling with massive cuts to government spending.
The government expects the Canadian economy to grow by 2.1 per cent in 2012 and 2.4 per cent in 2013. That’s basically in line with forecasts by the country’s biggest banks and financial institutions. “The global economic recovery remains fragile. The European sovereign debt crisis and banking crisis continues to weigh on global growth,” the documents read.
“The Canadian economy has remained resilient despite external weakness, reflecting sustained growth in the domestic economy.”
On its revenue growth forecasts, the government has taken a conservative approach, economists said. “It’s a reasonable thing to do; start with an average forecast and add a note of caution,” Shenfeld said. “Even if they are in the low end of the range they would still meet their budget target.” Personal income tax revenues — the federal government’s biggest source of revenue — are expected to come in at $125.4 billion this fiscal year, the budget documents show. Corporate income tax would come in at $32.4 billion. Sales tax and Employment Insurance premiums round out the government’s revenue base. The federal government’s budget projections are largely based on the cautious forecast it delivered last November, even though the outlook for the U.S. and Europe have since improved. “The risk has been scaled back. It’s not to say the risk has gone away. They’re just a little less worrisome than they were six months ago,” said Doug Porter, deputy chief economist at the Bank of Montreal. “While no one would call what’s going on in the U.S. a robust recovery, it does look a lot better than it did last fall.” The U.S. government is still struggling with budget cuts as it tries to rein in its massive deficit and stabilize its debt. In Europe, there are still worries that countries such as Greece, Spain and Italy may be overwhelmed by their debt and unable to pay back their lenders, triggering a banking crisis. “The economists also saw the possibility that increases in crude oil prices due to political turmoil in the Middle East could further dampen global growth in the short run,” the proposed budget reads.