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Canada Lowers Deficit Outlook Before Surplus in 2015-16

Canada Surplus
Jim Flaherty, Canada's finance minister, right, and Stephen Poloz, governor of the Bank of Canada, listen to a question at a news conference during the International Monetary Fund and World Bank Group Annual Meetings in Washington, D.C., on Oct. 11, 2013. Photographer: Andrew Harrer/Bloomberg

Canadian Finance Minister Jim Flaherty said the federal government will step up spending restraint, helping it swing to a larger-than-forecast surplus within two years.

The government will post a surplus of C$3.7 billion ($3.5 billion) in the year starting April 2015, up from the C$800 million projected in Flaherty’s March 21 fiscal plan, the Department of Finance said today.

While slower growth will reduce the government’s projected revenue by C$10.4 billion over the next five years, it now plans to spend C$14.4 billion less over the same period than earlier forecast. Freezing government operating budgets from April 1 will save a further C$5.2 billion over five years.

Flaherty, who told reporters today he intends to run in the 2015 election, said he’d like to use the larger surplus to pay down the nation’s debt. “My preference is to pay down public debt, because I don’t believe in public debt,” he said at a question-and-answer session in Edmonton, Alberta with Conservative lawmaker James Rajotte.

The government expects to raise C$2.0 billion over the next two years from selling the Ridley Terminals coal facility in British Columbia and land in B.C. known as the Dominion Coal Blocks. Sales of General Motors Co. shares announced in September will boost revenue this year by C$700 million.

‘Broad Contours’

The government expects the Canadian economy will grow 1.7 percent this year and 2.4 percent in 2014, unchanged from projections released in June.

Today’s fiscal update leaves the “broad contours of the road to a balanced budget” unchanged, said David Tulk, chief Canada macro strategist in Toronto at TD Securities Inc. “The update looks to be fairly modest, with the focus on expenditure reduction, in the spirit of under-promise and over-deliver,” Tulk said in an e-mail.

Flaherty’s fiscal update caused little reaction in financial markets. The Canadian currency depreciated 0.2 percent to C$1.0493 at 4:41 p.m. in Toronto. One Canadian dollar buys 95.31 U.S. cents. Yields on benchmark two-year government bonds rose one basis point to 1.13 percent.

Flaherty, 63, wants to safeguard Canada’s status as the only Group of Seven country with a stable AAA credit rating as he closes the C$56 billion gap incurred in 2009-2010 amid the depths of the financial crisis.

Canada will run a deficit of C$17.9 billion in the year started April 1, down from the C$18.7 billion shortfall projected in March, according to the fiscal update.

Shrinking Deficit

The deficit will shrink to C$5.5 billion next year, down from the C$6.6 billion forecast in March. The government’s projections include an adjustment for risks that reduces the budget balance by C$1.5 billion this fiscal year and C$3.0 billion every year for the following five years.

Prime Minister Stephen Harper’s government is trying to reassert itself as a responsible steward of the country’s finances amid an expenses scandal implicating four senators, including three Conservatives that Harper appointed.

Most damaging have been revelations that Harper’s former chief of staff, Nigel Wright, helped one senator repay disputed expense claims. The controversy has dominated parliamentary debate as opposition parties accuse the government of a cover-up, erasing a lead in opinion polls the Conservatives have held for most of the past eight years.

A return to surplus would allow the government to enact tax breaks that Harper promised during the 2011 federal election, including the ability of families to split their incomes for tax purposes.

‘Selling the Furniture’

Harper has said the Conservatives would follow through on such promises once the budget is balanced.

Liberal Party lawmaker Scott Brison, the spokesman for finance issues, said the government is “desperate to create the illusion of a real surplus before the next election.” He called the plan to sell assets “like selling the furniture to pay for the groceries,” by phone from Nova Scotia.

The government said it will pay C$2.9 billion this fiscal year to help victims of flooding in Alberta and a train crash in Lac-Megantic, Quebec in July, according to the document.

The Finance Department said last month Canada had an C$18.9 billion deficit for the fiscal year that ended March 31, C$7.0 billion less than projected seven months earlier. Flaherty told reporters Oct. 28 that the surplus in 2015-6 won’t be “tiny.” “There’ll be no doubt that we’re balanced in 2015,” he said.

Projected Growth

In June, the Department of Finance said the average projection of private sector economists for economic growth this year was 1.7 percent. That compares with 1.6 percent in the March budget. The June survey projected growth of 2.4 percent next year, lower than the 2.5 percent in the budget.

The Canadian economy will grow 1.7 percent this year and 2.3 percent in 2014, according to the median of a Bloomberg surveys.

Bank of Canada Governor Stephen Poloz surprised investors last month by dropping language about the need to raise interest rates, citing a delay in a pickup in exports and business spending. The central bank left its benchmark interest rate at 1 percent for the 25th consecutive meeting on Oct. 23.

Flaherty said that he will keep a “sharp eye” on Canada’s housing market and would intervene again if he thought it necessary. The budget update document said the main domestic risk to Canada’s economy “continues to be the high levels of debt held by Canadian households,” and said the “recent pick-up in housing market activity” could lead to more debt accumulation.

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