July 22, 2015 / 5:13 PM / 2 years ago

UPDATE 1-Canada Conservatives cling to surplus pledge despite watchdog report

3 Min Read

(Adds government and opposition reaction, latest budget figures)

By Randall Palmer

OTTAWA, July 22 (Reuters) - Canada's Conservative government insisted on Wednesday it would balance the country's books this year despite a watchdog's report that said economic weakness would turn the narrow budget surplus the Conservatives pledged into a billion-dollar deficit.

The Conservatives, facing an Oct. 19 general election, have repeatedly cited their plan to deliver Canada's first budget surplus since the financial crisis as evidence of their strong economic credentials.

But the office of the Parliamentary Budget Officer (PBO), which has a mandate to provide independent analysis to lawmakers, forecast on Wednesday a deficit of C$1.0 billion ($770 million) for 2015-16, after using up the budget's C$1 billion contingency reserve and factoring in other economic developments.

The government's budget in April had projected a C$1.4 billion surplus plus the reserve. The economy has since been struggling due to sharply lower prices for oil, a major Canadian export.

Defending the government's target, Rob Nicol, spokesman for Prime Minister Stephen Harper, noted there was already a budget surplus of C$3.95 billion for April and May, compared with a C$1.15 billion deficit for the same period in 2014.

He did not say whether the government would implement more spending cuts to ensure a surplus, but Liberal legislator Scott Brison said: "With the economy flat-lined, with the economy actually shrinking, it's not a time to cut further."

Brison declined to say if the Liberals would run a surplus this fiscal year if they win October's election.

The left-leaning New Democratic Party (NDP), leading in many opinion polls, said the Conservatives have staked their brand on a balanced budget.

"They failed to build a balanced economy and will leave Canadians with another budget deficit," said NDP Member of Parliament Nathan Cullen.

The PBO report forecast that the government's projection of a C$1.7 billion surplus for 2016-17 would be reduced to C$600 million after using up the reserve. It predicted a C$2.2 billion surplus for 2017-18, versus the government's C$2.6 billion projection in the April budget.

Brison and Cullen had requested the PBO report after the Bank of Canada downgraded its real economic growth forecast for calendar 2015 last week to 1.1 percent from 1.9 percent because of lower oil prices. The budget assumed 2.0 percent growth, based on private-sector forecasts.

The PBO analysis assumes government spending plans would remain as in the budget, though governments do sometimes spend less than budgeted.

$1=$1.30 Canadian Editing by Jeffrey Hodgson; and Peter Galloway

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