Slowing Canada Economy May Cut Flaherty’s Fiscal Cushion

Canada’s Slowing Economy May Erode Flaherty’s Fiscal Cushion
Canadian Finance Minister Jim Flaherty’s March 29 fiscal plan, which forecast surpluses beginning in 2015, projected nominal GDP growth of 4.6 percent this year. Photographer: Simon Dawson/Bloomberg

Canadian Finance Minister Jim Flaherty says he may be losing the cushion he built into his fiscal plan as the world’s 11th-largest economy slows.

Flaherty’s said today he may need to revise his deficit targets amid risks to the global recovery, even as the latest data suggest the government is on track.

“The current global economic environment means there is downward risk to the fiscal track presented in budget 2012,” Flaherty told reporters today in Toronto, saying the European debt crisis is the key risk to Canada’s economy, which is also being affected by sluggish U.S. growth.

Statistics Canada today released second-quarter gross domestic product figures today that show the country’s economy stalled at a 1.8 percent annual rate.

The weak growth, coming after negative economic reports that brought the Citigroup Economic Surprise Index for Canada to its lowest since 2009, may crimp government revenue and undermine Flaherty’s ability to come in below his target for a C$21.1 billion deficit this fiscal year.

“It’s unlikely they are going to outperform in a big way,” said Doug Porter, deputy chief economist at BMO Capital Markets in Toronto. “As recently as three or four months ago it did look like as if there was a big possibility” that Canada would “seriously” beat this year’s deficit target, he said.

Fiscal Plan

Flaherty’s March 29 fiscal plan, which forecast surpluses beginning in 2015, projected nominal GDP growth of 4.6 percent this year. Nominal GDP is a better predictor of the tax base and revenue because it includes changes in prices. The budget built in a C$3 billion cushion for revenue by assuming output would be about C$20 billion below the consensus of private-sector forecasts.

That assumption now seems to be closer to reality than the initial growth projections, economists say. Adding a cushion to the budget “was clearly the right approach,” Flaherty said today.

Toronto-Dominion Bank deputy chief economist Derek Burleton said he’s forecasting about 3.5 percent growth in nominal GDP this year, while Royal Bank of Canada projects about 3.4 percent this year and Bank of Montreal’s outlook is 3.7 percent. Nominal GDP in the quarter was 3.5 percent higher than a year earlier, Statistics Canada said today, with the growth rate slowing to an annualized 0.5 percent pace in the April-June period.

Nominal Growth

The country’s economy in nominal terms grew by 5.9 percent in 2011, and the decline this year reflects in part falling prices for the country’s commodities. The Bank of Canada Commodity Average Price Index has averaged 638.18 this year, 5.1 percent lower than the 2011 average.

Flaherty today said his government would be prepared to take additional stimulus measures if there is another major economic crisis.

“What has been done before can be done again,” Flaherty said.

On the positive side for the government’s balance sheet, borrowing costs are below those forecast in the budget, helping offset the impact of any slowdown in revenue. Ten-year government bond yields have averaged 1.9 percent this year, compared with budget forecasts for an average 2.2 percent in 2012. A one percentage-point increase in borrowing costs would raise debt charges by about C$1.7 billion and raise the deficit by C$600 million, the 2012 budget estimated.

Tax Receipts

Monthly budget data has also been showing buoyant revenue growth, at least so far this fiscal year. Federal government receipts in the first three months of the year that began in April are up 4.7 percent, led by higher employment insurance premiums and corporate income taxes.

Canada’s federal deficit in the first three months of the fiscal year that began in April fell 53 percent to C$1.98 billion ($2.01 billion), the finance department said in a document published today.

“It’s not clear at this stage how they all net out,’ Burleton said in a telephone interview. ‘‘Clearly from an economic perspective, we are looking at a weaker performance compared to what we had expected earlier this year.”

Flaherty is due to update his fiscal projections over the next months in his traditional fall economic update.

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