Harper Shrugging Off Oil Shock Sets Up Budget Reality Check

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For Canadian Prime Minister Stephen Harper, it’s as if the oil shock never happened.

Harper is sticking to his plan to balance the budget this year and deliver tax cuts and transfer payments as the country prepares for a general election by October. He must convince voters the plan is credible, given an oil rout that has eroded most of the government’s fiscal wiggle room.

“The challenge is that the surpluses that were previously projected aren’t going to materialize in the near term because of the drop in oil prices,” said Craig Alexander, chief economist at Toronto-Dominion Bank. “The government is going to balance the books, the only question is how.”

Harper’s leaving that to Joe Oliver, the rookie Canadian finance minister who, in his first budget, will need to paint a positive picture of the economic outlook to bolster confidence Harper can deliver. Oliver said Thursday in Toronto he’ll release the budget on April 21.

“External risks are a continuing concern for canada’s economic recovery,” Oliver said. “The good news is our fiscal situation is sound and economic growth has been solid.”

Until the rout, which has seen prices for Canada’s largest export fall by half since July, everything was going as planned for Harper, with his government on pace to produce a balanced budget with plenty of room left over for tax cuts, just in time for the election.

‘Dominant Story’

Oliver, who delayed the budget to gauge the impact of oil’s collapse, will probably borrow some optimism from Bank of Canada Governor Stephen Poloz, who said last week the parts of the economy not related to crude are starting to pick up.

“The rest of the economy seems to be doing much better and I think it will be the dominant story by mid-year,” Poloz said in London. The central bank surprised markets by cutting its benchmark rate in January as “insurance” against the damage from collapsing oil.

Relative stability in energy prices in recent weeks and a positive outlook will also allow Oliver to relax forecasting cushions in his fiscal plan that would limit the government’s ability to finance new measures.

Harper announced C$27 billion ($21.4 billion) in additional tax cuts and transfer payments over six years in October. That included a controversial measure that will allow couples with children to divide their income for tax purposes. Harper said those cuts won’t be financed by deficits -- effectively borrowing -- a practice he pledged to end this year.

‘Big Question’

The two main opposition parties -- the New Democratic Party and Liberals -- are criticizing Harper’s tax cuts as fiscally reckless, ineffective for boosting jobs and growth and good only for the well-off.

“The big question of how will they reverse a very anemic job market is what Canadians will be voting on in the fall,” said Nathan Cullen, the NDP finance critic. “If the tax plan were working, we would be a stronger economy.”

Indeed, the oil math is jarring. The parliamentary budget officer reported in January the drop in oil prices since the government’s last fiscal update in November means annual revenue will be on average C$7.6 billion less than forecast.

Harper’s message is more simple: we cut taxes, the opposition will raise them.

“If the other guys want to tell you they are going to take it away, good luck to them selling that message,” Harper said at a March 18 press conference. “Canadians want lower taxes, they don’t want higher taxes for their families.”

Tax Cuts

Tax cuts have been the mainstay of Harper’s nearly decade-long run as prime minister, with tax revenue in 2011 and 2012 falling to 11.5 percent of GDP, which according to data compiled by Bloomberg from Statistics Canada archives, may be the lowest since 1940. Had the federal government’s tax take been left at 2006 levels, federal revenue would be about C$35 billion higher annually.

Government marketing of Harper’s tax cut record is already in full swing even before the budget release. The finance department last month released a tablet-friendly feature on its website allowing taxpayers to gauge their savings since Harper came to power in 2006. The swipe-friendly website will be updated immediately after the budget is released.

It’s a tough message to counter, given how broad Harper’s tax cuts have been, said Nik Nanos, an Ottawa-based pollster. Harper’s tax record includes cuts in the national sales tax, lower tax rates for corporations and a slew of boutique breaks for everyone from hockey moms to firefighters.

“Criticizing the tax record of this government doesn’t make for good politics,” said Nanos, chairman of Nanos Research Group.

The opposition hopes raising concerns the government’s fiscal plan lacks credibility will strengthen their case.

“The Conservatives are asking us to vote on their expensive pre-election giveaways like income splitting without giving us a budget that will provide us with the real context of the fiscal framework,” Liberal lawmaker Scott Brison said by phone from Ottawa.

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