Budget watchdog affirms 2015 surplus despite slower growth

Canada's budget watchdog predicts the Harper government will be able to balance the budget in 2015 despite slowing growth, but concluded it will be a close shave and that subsequent surpluses will be smaller than Ottawa projects.

The latest fiscal and economic report card from the parliamentary budget officer shows the surplus in 2015-16 a razor-thin $200 million lower than the March budget estimate of $800 million.

As well, the office sees the following year's surplus at a mere $1.7 billion, less than half the budget's prediction of $3.9 billion.

The moderately lower fiscal track may turn out to be significant because the prime minister is counting on a balanced budget and preferably a modest surplus in the March 2015 budget in order to be able to fulfil his 2011 campaign pledge to introduce income splitting for tax purposes in time for the Oct. 15, 2015 election. The promise was contingent on having eliminated the deficit.

The report notes that the calculations may be subject to adjustments. The office notes that it did not attempt to include the impact of the throne speech promise to freeze operating budgets going forward.

The estimates, however, do incorporate last week's surprise announcement that the deficit in the just-completed 2012-13 fiscal year was $7 billion lower than projected at $18.9 billion. As a result, the budget office says this year's shortfall will come in at $14.7 billion, about $4 billion lower than forecast in the government's March budget.

Economic outlook downgraded

Finance Minister Jim Flaherty, who is being briefed Monday on the state of the economy by private sector analysts, is expected to issue his updated fiscal projections in the next few weeks.

Slower economic growth next year and lower-than-projected commodity prices are the key reasons for the tempered fiscal projections, says the budget office report.

"These developments have led PBO to revise down the outlook for the Canadian economy relative to its April (forecast)," the report says. "As a result, PBO's outlook for nominal GDP the broadest measure of the government's tax base is lower, by $25 billion annually, on average, than the projection based on an average of private sector forecasts."

The report says the economy will likely grow two per cent in 2014, not the 2.5 per cent predicted in the March budget.

As well, Flaherty's decision to freeze employment insurance premiums is expected to cost the treasury about $700 million over the next two years, the report states.

In its economic outlook, the budget office says it expects the unemployment rate to rise slightly and that the Bank of Canada will keep its key interest rate at one per cent through the first quarter of 2015.