Canadian Finance Minister Jim Flaherty may say he won’t be able to fulfill his plan to balance the budget within three years, and may extend the central bank’s inflation-control mandate, in an update of the government’s fiscal plan to be released today.
Flaherty, 61, will update his projections at a speech to the Calgary Chamber of Commerce at about 12:30 p.m. local time, according to a person familiar with the plan who spoke on condition of anonymity because the speech content isn’t public. He’ll also scale back planned payroll tax increases in the update and extend a work-sharing program to boost the recovery, the person said.
Flaherty said Oct. 25 he will cut growth projections to reflect dimming global economic output when he unveils the annual update to his fiscal plan, declining at the time to say how that will influence his plans to balance the budget. Instead, he said the government still aims to eliminate the deficit “in the medium term.”
“If they are inclined to make any adjustments, they’ll probably look towards a more gradual reduction in deficits and that gives them a nod in the direction that there are still some vulnerabilities out there,” said Craig Wright, chief economist at RBC Capital Markets in Toronto.
Flaherty may also use the fiscal update to extend the Bank of Canada’s inflation-control mandate. Canadian governments used fiscal updates to announce renewals of the central bank’s inflation control mandates in 2006 and 2001. The current Bank of Canada policy agreement expires at the end of this year.
Flaherty’s office released estimates last month showing that economists forecast Canada’s economy will generate C$83 billion ($82 billion) less in output between 2011 and 2015 than the government projected in June. That may reduce revenue by about C$12 billion over the period, based on figures from the June budget showing the government expects revenue to be about 15 percent of nominal output over that time.
Canada’s federal government will generate C$8 billion less in revenue through the fiscal year that ends in March 2016, according to an Oct. 27 report by Toronto-Dominion Bank economists Derek Burleton and Sonya Gulati. That means the country won’t run a surplus until the 2016-2017 budget year, and hold C$5.6 billion more debt than planned over five years, unless it takes additional measures, the report said.
In his June budget, Flaherty projected deficits of C$32.3 billion in the current year, shrinking to C$18.4 billion in 2012-13 and C$7.4 billion in 2013-14, before swinging to a C$3.7 billion surplus in 2014-15, once a review of government spending is completed.
The government may be reluctant to make up revenue losses through new spending cuts at a time when the world economy is slowing, said Doug Porter of Bank of Montreal’s capital markets unit in Toronto.
“I don’t think that should necessarily be their absolute guiding star at this point to hit the balanced budget target by 2014 come heck or high water,” Porter, deputy chief economist at BMO, said in a telephone interview.
The update will contain stimulus measures that include lowering planned increases in payroll taxes. CTV reported late yesterday that employment insurance premiums paid by employees will rise by 5 cents per C$100 of earnings next year, less than the 10-cent increase budgeted in June. Employer premiums will climb by 7 cents, also half the budgeted amount. The government will also extend a work-sharing program, the television broadcaster said.
Harper acknowledged last week that the European debt crisis has begun to impact the country’s growth outlook, citing a 54,000 drop in employment during October.
“It’s a reflection of the lack of confidence that has been spreading in world markets as a consequence of the European debt crisis,” Harper told reporters Nov. 4 in Cannes, France, where he attended a meeting of leaders from Group of 20 countries. “This is not by any way unique to Canada.”
Canadian data have shown a rebound, accompanied by languid job growth, following a contraction in the second quarter.
The country’s employers have added a net 8,520 jobs over the past four months, even as output data show the economy may have grown at a quarterly rate of more than 2.5 percent in the third quarter.
The Bank of Canada last month cut its forecasts for economic growth through the middle of 2012 as the U.S. and European economies falter, predicting the annualized pace of expansion in the world’s 10th largest economy will average 1.8 percent in the four quarters through June, compared with a previous estimate of 2.8 percent.
Central Bank Mandate
Governor Mark Carney has said economic recovery from the global financial crisis will take longer than from past recessions, and that the policy interest rate -- currently 1 percent -- may not return to normal levels even when the country has returned to its capacity levels.
The bank’s inflation control mandate may be tweaked to let it return inflation to target more slowly when there are risks to the financial system, the Globe and Mail newspaper reported Oct. 17.
At the last renewal, in November 2006, the central bank and finance department agreed the target would remain the 2 percent midpoint of a 1 percent to 3 percent range.
Porter said any move to introduce flexibility into the mandate may help the central bank keep interest rates in check in the face of a weak economy, even if inflation remains above the Bank of Canada’s target.
Return to Surplus
Flaherty’s governing Conservatives promised to accelerate Canada’s return to surplus during the campaign for May 2 elections that returned Prime Minister Stephen Harper to power with his first parliamentary majority.
The change in growth outlook won’t affect the government’s budget projections in the “near-term,” Porter said.
Canada’s budget deficit was a smaller-than-forecast C$33.4 billion in the year ended March 31, C$2.8 billion less than predicted in the June budget. The deficit in the first five months of the current fiscal year narrowed to C$10.7 billion from C$13.5 billion.
“The near-term targets are still more or less on course even though the growth outlook has taken a step back,” Porter said.