OTTAWA (Reuters) - Canada’s future budget deficits may be smaller than anticipated, a major bank said on Thursday, which would give the government more scope to include measures demanded by opposition parties and avoid an election.
The minority Conservative government will present its budget on March 22 and many observers are betting the three opposition parties will unite to bring down the government in Parliament over the plan and force an election.
“With the higher-than-expected economic growth numbers for 2010 and 2011, the government appears to have more wiggle room to listen to the demands being made,” economists Derek Burleton and Sonya Gulati at Toronto-Dominion Bank unit TD Securities wrote in a special report on the upcoming budget.
After a decade of budget surpluses, Ottawa sank into the red during the global financial crisis due in part to a massive spending plan to designed soften the recession’s blow on Canadians.
After a record C$55.6 billion ($57.3 billion) deficit in the 2009-10 fiscal year, the government aims to eke out a small surplus by 2015 by restraining spending, even as it cuts corporate taxes further.
That plan will be more credible if Finance Minister Jim Flaherty explains in his budget precisely what steps he will take to cap spending, TD and other experts say.
TD’s fiscal outlook for the next six years, excluding any possible new measures that might be in the budget, is more upbeat than the government’s last outlook in October.
Stronger-than-expected economic growth and gains from General Motors Co’s initial public offering are among the items that underpin TD’s forecasts.
It sees a deficit for 2010-11 of C$39.5 billion, compared with the government’s estimate of C$45.4 billion. It predicts a surplus of C$7.1 billion by 2015-16 versus Ottawa’s C$2.6 billion surplus forecast.
TD listed a couple of opposition demands as possibilities for inclusion in the budget, including the New Democratic Party’s push for income support for seniors, which the NDP estimates would cost C$700 million a year.
Tax expert Len Farber, a former Department of Finance official now with Ogilvy Renault law firm, said that of all the opposition parties’ requests, this is the one most likely to succeed in being included in Finance Minister Jim Flaherty’s budget because it’s not very costly and is easy to implement.
The Bloc Quebecois is demanding compensation for the province of Quebec for harmonizing provincial and federal sales taxes in the 1990s, which the Bloc says would have a one-time cost of C$2.2 billion. Although Ottawa has said it is unlikely to reach a deal with Quebec by budget time, it could include the cost in 2011-12 on the assumption they will strike an agreement later, TD said.
Farber said any such deal would be worth less than C$2 billion.
Acceding to either of those demands could buy the Conservatives enough opposition support in Parliament to pass the budget and stay in power.
Apart from the political jostling, market players will be scouring the budget document for signs the government’s plan to limit expenditure growth to 1.1 percent a year through to 2015-16 is feasible.
“Such a feat would represent one of the most prolonged periods of federal fiscal restraint in the post-war era and coincides with a time when age-related spending pressures are intensifying,” TD said.
Most experts believe there is room to make cuts in the civil service, Farber said. But so far Flaherty has been giving signs that any cuts will be surgical rather than deep and broad-based, he said.
Reporting by Louise Egan; editing by Peter Galloway