April 8, 2015 / 12:42 PM / 2 years ago

UPDATE 3-Canada finance minister to set balanced budget law

(Recasts with finance minister's speech)

By Alastair Sharp

TORONTO, April 8 (Reuters) - Canadian Finance Minister Joe Oliver announced legislation on Wednesday committing the government to a balanced budget except if there is recession or an "extraordinary circumstance."

The bill will fulfill a 2013 pledge by the ruling Conservatives as they head into an October election seeking to portray themselves as the best economic managers.

Oliver has pledged to deliver a balanced budget for 2015-16 on April 21 despite the damage to Canada's economy inflicted by low oil prices.

It will be Canada's first federal balanced-budget bill, though eight of the country's 10 provinces enacted such legislation during the 1990s. Passage is assured since the Conservatives have a parliamentary majority.

Oliver said the "only acceptable deficit" under the legislation would be in the event of a recession or during war or natural disaster with costs exceeding C$3 billion ($2.4 billion) in a year.

A deficit during normal economic times would trigger an automatic freeze on departments' operating budgets. Salaries for ministers and deputies would be cut by 5 percent until budgets are balanced.

"We will never be able to keep taxes low and provide direct benefits to hard-working Canadians and their families, even in the face of an unexpected downturn, without balanced budgets in good economic times," Oliver said.

Economists have long debated whether balanced-budget legislation is effective or counter-productive in tying governments' hands.

Canada's parliamentary budget officer said in a report in September that seven of the eight provincial acts were amended, suspended or repealed shortly after enactment or to allow deficits following the global financial crisis in 2008. But the report said seven provinces would have reaffirmed or reintroduced such legislation by end-2014.

Scotiabank deputy chief economist Aron Gampel said reinforcing fiscal rectitude could help improve competitiveness, as large debt burdens over the longer term are troublesome.

Randall Bartlett, a senior economist at Toronto-Dominion Bank, said studies showed that balanced-budget legislation "can work in good times, but in bad times it can be ineffective."

He said it could be difficult to pin down whether Canada is in recession, defined as two consecutive quarters of economic decline, precluding timely action.

Ottawa might not have been able to roll out the massive stimulus plan it did in January 2009, for example, since it was not clear at that time that growth in the fourth quarter of 2008 was negative, let alone the first quarter of 2009, Bartlett noted.

$1 = 1.24 Canadian dollars Additional reporting by Randall Palmer and David Ljunggren in Ottawa and Jeffrey Hodgson in Toronto; editing by Chizu Nomiyama, G Crosse and Ted Botha

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