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Economists Say Flaherty Should Keep Deficit Focus Amid Canada Revenue Gain

Canadian Finance Minister Jim Flaherty should keep prudent projections in his next fiscal plan and resist spending unbudgeted revenue gains until the country has secured efforts to balance the budget, economists said.

Flaherty released forecasts yesterday showing economists project Canada’s economy will generate C$61 billion more output by 2015 than the government estimated in its October budget update. Based on previous government assumptions, the higher output suggests Flaherty’s government may take in as much as C$9 billion ($9 billion) more in revenue over the next five years than forecast last year.

The added revenue may help assuage concerns expressed by Canada’s parliamentary budget officer that the government may struggle to eliminate the nation’s deficit by 2015. Kevin Page told lawmakers yesterday the country faces a small structural deficit that won’t be eliminated without further spending reductions.

“On the spending side, we haven’t yet seen the declines,” said Pedro Antunes, director of economic forecasting at the Conference Board of Canada, one of the organizations that Flaherty consults for his fiscal planning. “It’s probably wise not to spend that money.”

Canada had a record C$55.6 billion ($55.6 billion) budget deficit in the fiscal year that ended last March. The shortfall will narrow to C$45.4 billion in the current fiscal year, be cut in half in two years and disappear altogether in 2015, according to Flaherty’s prior fiscal plan, as temporary stimulus projects expire, the government implements cost controls and economic growth and higher payroll taxes boost revenue.

‘Less Uncertainty’

Flaherty projected growth rates in the October update that were below those forecast by the economists he consults for fiscal planning, citing risks he said were tilted to the downside. If growth turns out stronger than Flaherty projects, his Conservative government would have more scope to narrow Canada’s budget shortfall, extend stimulus measures or offset any unrealized spending cuts.

Flaherty, 61, told reporters yesterday he hasn’t decided whether to change his policy on growth assumptions in his next budget, which is due in March. “It’s fair to say there is less uncertainty now than there was before,” Flaherty said after meeting economists from banks, universities and research institutes in Ottawa. “We’ll see when we formulate the final assumptions how much we deal with adjustment” of the forecasts.

“I don’t see any reason they should stop” using prudent budget projections for revenue, said Sheryl King, head of Canada economics at Bank of America Merrill Lynch. “Any surprises they have should go toward debt pay-down.”

Growth Forecasts

Flaherty released data yesterday from a December survey of economists that show forecasts for real and nominal growth were little changed from the last survey, taken in September.

Economists project the economy will expand by 2.4 percent in 2011 and by an average of 2.7 percent over the next five years. Nominal gross domestic product, which isn’t adjusted for inflation and is the broadest measure of the tax base, will grow an average of 5 percent over the next five years, according to the survey.

Lawmakers from all three opposition parties have called on the government to use any additional fiscal leeway this year to extend parts of its two-year stimulus package beyond March 2011.

The opposition Liberals and New Democratic Party also have called on the government to scrap reductions in the corporate income tax rate that they say are unaffordable.

To contact the reporter on this story: Theophilos Argitis in Ottawa at targitis@bloomberg.net;

To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net; David Scanlan at dscanlan@bloomberg.net.

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