PBO Says Harper Budget Balance Jeopardized With Oil at $48

Prime Minister Stephen Harper’s promise to balance Canada’s books in 2015 will be in jeopardy if crude oil continues to trade at about current prices, the Parliamentary Budget Officer said.

West Texas Intermediate trading at $48 a barrel through 2015 would reduce the federal budget balance by C$5.3 billion ($4.3 billion) in the fiscal year starting April 1, resulting in a C$400 million shortfall, the PBO’s Scott Cameron, Helen Lao and Chris Matier said in the report Tuesday from Ottawa. WTI has averaged just below $48 this year.

“The fiscal impact of the recent decline in oil prices will depend on the persistence of low oil prices and the forces underlying the weakness in oil prices,” said the report, which estimates lower oil prices will reduce the level of nominal output this year by C$48 billion.

Harper, facing elections in October, has insisted his government will run a balanced budget in 2015-16, while sticking to pledges to reduce taxes without imposing additional cost cuts. The Finance Department predicted in November the government would run a C$4.9 billion surplus in 2015-16, including C$3 billion set aside for contingencies.

“We will balance the budget,” Finance Minister Joe Oliver told lawmakers in Parliament today, adding the budget office’s paper suggests the government has room to meet that goal. Jean-Denis Frechette, the head of the PBO, told reporters today that meeting the deficit may not be “that difficult,” according to the Globe and Mail.

Postponed Budget

The PBO provides independent analysis on the state of the nation’s finances and upon request provides cost estimates for parliamentary proposals. The oil-effects analysis was requested by opposition lawmaker John McKay.

Oliver said this month he would postpone the next budget until at least April to give the government time to gauge the impact of lower oil prices. He also said the government may use funds set aside for contingencies to balance the budget.

Canada’s dwindling budget flexibility has prompted opposition lawmakers to question the affordability of recent tax cuts. Harper unveiled tax cuts in October for families with children that along with other measures to benefit small businesses will cost the government C$5 billion in 2015-16.

‘Reckless Mismanagement’

“The Conservatives’ reckless economic mismanagement has cut our recovery off at the knees and left far too many Canadians facing a weak job market and long-term unemployment,” New Democratic Party finance critic Nathan Cullen said in a statement Monday.

The drop in oil prices from the $81 a barrel assumed by the government in the November update will reduce revenue by an average of C$7.6 billion annually, the PBO said in today’s report. Expenses will decline by an average C$2.8 billion. The total budget impact of oil remaining at $48 would be about C$24 billion over the next five fiscal budgets, the report said.

The PBO only considers the impact on prices and assumes real gross domestic product will not be affected, meaning the forecast impact should “be viewed as lower bound estimates,” the report said.

Before it's here, it's on the Bloomberg Terminal.