Canada Could Drop Budget Goal If Growth Slows, IMF Says

Canadian Finance Minister Jim Flaherty could abandon his plan to eliminate the country’s budget deficit in 2015 if economic growth remains sluggish, the International Monetary Fund said.

Fiscal policy will be a “modest headwind to growth” that is already threatened by the risk of another year of weak global demand for Canada’s exports, the IMF said in its annual Article IV consultation report today.

“It’s important to strike the right balance,” between growth and curbing spending, Roberto Cardarelli, the IMF’s chief of mission to Canada, said on a conference call. “There is room to delay the adjustment needed to return the budget to balance in 2015 if there is no meaningful pickup in growth.”

The assessment comes as Flaherty insists that his next budget, scheduled Feb. 11, will show a surplus for the fiscal year starting April 2015. Prime Minister Stephen Harper’s Conservative government has tied promised tax breaks to balancing the books before the next election, scheduled in 2015, and Harper and Flaherty have emphasized Canada’s strength in government finances and job markets compared with the U.S. and Europe.

“To ensure that Canada remains well positioned to withstand any future shocks and is able to address the future priorities of Canadians, it is vital to the Government’s good economic stewardship that it remains vigilant and balance the budget in 2015,” Flaherty said in a statement following the IMF report.

Policy Delay

The IMF also said that Bank of Canada Governor Stephen Poloz can also delay raising his 1 percent policy interest rate because of economic weakness. That marks a shift from its prediction last year that an increase may be needed as the economy picked up. Canada’s dollar has fallen to four-year lows since Poloz dropped a bias in October to raise rates and he said last month the risks of inflation persisting below his 2 percent target have increased.

The dollar strengthened 0.6 percent to C$1.1066 at 11:38 a.m. in Toronto today. Canadian government bond yields declined, with the security due in five years tumbling 2 basis points to 1.53 percent, the lowest since June.

Accommodative Policy

“The IMF saw room to maintain the current highly accommodative monetary policy stance for a longer period than anticipated a year ago, given the low inflation rate, greater output gap, looming downside risks, and the ongoing moderation of the housing market,” the fund said in its report. Staff predicted the central bank will raise its rate “starting in early 2015” and take it to 4 percent by 2019.

If market borrowing costs surge as the U.S. Federal Reserve pares its monetary stimulus, “the Bank of Canada would have room to at least partly offset the tightening of financial conditions by cutting the policy rate,” the IMF said.

Canada’s provincial governments have less room to offer new tax cuts or spending because they have larger debt burdens, the IMF said. The economy also faces risks from housing prices that are “still overvalued” by about 10 percent, and the IMF said they discussed with Canadian officials the merits of “rethinking” the government’s role in providing mortgage insurance over the long term.

Canada’s growth of 2.2 percent this year will quicken from 2013’s 1.7 percent because of stronger demand from the U.S., which consumes three-quarters of Canada’s exports.

The IMF also predicted the jobless rate will decline to 6.9 percent from 7 percent this year, and inflation will accelerate to 1.5 percent from 1 percent.

The report was based on IMF staff visits to Toronto, Calgary and Ottawa from Nov. 12 to 16.

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