Canadian Finance Minister Jim Flaherty said he will delay plans to balance the federal budget by one year and run larger than expected deficits as lower commodity prices and slower growth hamper the finances of the only Group of Seven country with a stable AAA debt rating.
Flaherty’s budget update projects a return to balance by the fiscal year beginning April 2016, one year later than forecast in his March budget, as he cut revenue projections by C$36.2 billion ($36.1 billion) over the next five years. The deficit for the current fiscal year was raised to C$26 billion from C$21.1 billion, little changed from the previous year.
Canada’s dollar declined as the report added to concern renewed risks posed by the U.S. and sluggish growth in Europe are damping the outlook for the world’s 11th-largest economy. Government bonds held gains after the speech. Canada is the sole G-7 country and one of only three in the Group of 10 with stable AAA ratings from Standard & Poor’s, Moody’s Investors Service and Fitch Ratings.
“This doesn’t really change where Canada stands as far as other major economies,” said Claudio Ferri, a senior fixed income portfolio manager at Montreal-based State Street Global Advisors, which manages C$2 trillion of assets. “Canada is still on sound fiscal footing.”
Flaherty said his fiscal plan tries to balance the return to surpluses with ensuring the economy isn’t hurt by fiscal tightening.
“Our country is not immune to global forces, nor can we control the economic shocks that ripple outwards from other nations,” Flaherty, 62, said in a speech to the Fredericton Chamber of Commerce today.
The Canadian dollar weakened 0.2 percent to C$1.0021 per U.S. dollar at 3:27 p.m. in Toronto. It touched C$1.0036, the weakest level since Aug. 3. One Canadian dollar purchases 99.79 U.S. cents.
Canadian government bonds advanced, pushing the yield on 10-year benchmark notes down three basis points, or 0.03 percentage point, to 1.69 percent. The price of the 2.75 security due in June 2022 rose 25 cents to C$109.36.
The budget update “is a reflection of a softer global growth environment,” said Robert Kavcic, a Bank of Montreal economist in Toronto. “We are still in a relatively very strong fiscal position,” he said, adding the budget could still be balanced by 2015-16.
The budget showed a lower projection for commodity prices than the last fiscal plan in March, which Flaherty cited as the main reason for reduced revenue through the 2016-17 fiscal year.
Lower prices for goods such as metals and oil will reduce output by an average of C$25 billion, or 1.3 percent, each year between 2012 and 2016, according to the finance department.
The government will record C$52.9 billion of cumulative deficits between 2012 and 2016, the department said in its report, up from C$29.2 billion projected in March.
The main global economic risks cited in today’s report were Europe’s sovereign debt and banking crisis and the so-called U.S. fiscal cliff, the $607 billion of spending cuts and tax increases due to take effect in January unless the ﾟCongress acts.
“I am hopeful that further political stability will enable the administration to find measures to avoid the fiscal cliff and put their finances on a sustainable track,” Flaherty said.
With elections scheduled again in 2015, the projections suggest a slowing global economy will keep Prime Minister Stephen Harper’s government from returning the country to balance within his current mandate. In last year’s elections, which returned Harper to power with his first majority government, the Conservatives pledged to eliminate the deficit by 2014 and introduce new measures such as income splitting for families once the government began to run surpluses.
“I don’t play with numbers; the numbers are the numbers,” Flaherty told reporters in Fredericton, when asked about failing to return to surpluses before the next election. “We’re talking about relatively small amounts of money in the big picture,” adding the government is on track to balance the budget in the “medium term.”
The main opposition New Democratic Party criticized the government for not doing enough to stem slowing growth.
“The government doesn’t have a plan,” lawmaker Peggy Nash, who is responsible for budgetary issues for the NDP, said in Ottawa. “It just seems to be saying steady as she goes, in spite of the real challenges so many Canadian families are facing.”
The economy will grow 2 percent next year after adjusting for inflation, compared with a March prediction of 2.4 percent, with both figures based on the average forecast of private-sector economists, the finance department said in its report. Today’s report reiterated that the growth rate will accelerate to 2.5 percent in 2014 and 2015.
Expenses through 2016-17 are C$5.2 billion lower than in the March projection, as higher program spending is more than offset by lower expected interest rates that reduce public debt charges, the department said in its report.
The updated fiscal plan shows federal debt rising to C$631.1 billion by March 2018, from C$582.2 billion in March, with the ratio of debt to gross domestic product narrowing to 28.1 percent from 33 percent.
The fiscal plan built in a C$1 billion cushion for revenue this year and C$3 billion each year through 2017-18 by assuming output would be about C$20 billion below the consensus of private-sector forecasts.
The government also revised accounting procedures for tax credits that have raised revenue and expense without altering its budget balance, the finance department said.