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OTTAWA (Reuters) - Canada needs to put forward a more credible austerity package this year and next in order to prevent a structural budget deficit in the longer term, the country's budget watchdog said on Wednesday.
Kevin Page, the parliamentary budget officer, sees the fiscal deficit shrinking quickly over the next six years due to economic growth and the withdrawal of stimulus.
The government has promised to balance the budget by 2014-15 partly by cutting C$11 billion ($11.2 billion) from government operating costs. But it hasn't clearly spelled out how it will restrain spending nor has it set any more specific annual or medium-term targets, to which it can be held accountable.
"We seem to have thrown the fiscal rules out when the recession hit," Page told Reuters in an interview. "We use to have a 25 percent debt-to-GDP target in the medium term ... this government got rid of prudence reserves," he said.
"We will focus on austerity. Do we have a good austerity package? ... What are the risks around that package? Is there transparency?"
Page warned that unless the newly elected majority Conservative government takes steps during its four-year mandate to address the long-term issues of an aging population and dismal productivity, it will continue to suffer funding problems well into the future.
One major headache facing the Conservatives is upcoming negotiations over payments to provincial governments for healthcare costs, which are rising as baby boomers age.
A 10-year accord that increased these transfer payments by 6 percent a year ends in 2014 and many experts think funding cannot continue to rise at that rate without spending cuts elsewhere.
Page, who plans a report in September assessing these long-term problems, said he expects the government to begin tackling the health care conundrum in the 2012 budget, or possibly in the fiscal update this fall.
"The next budget will be set up as a much bigger document," he said. "If we don't have a rich debate and we sell ourselves short ... it's hard for me to imagine that we'd make longer term stable decisions, for example on funding for healthcare."
Page's office issued a report on Wednesday saying Canada's economy and fiscal health will fare worse than expected in coming years, based on its own economic forecasts.
The report predicted the government would not be able to eliminate the federal deficit by 2014-15 as it has planned due to higher projected operating expenses.
Mediocre growth, unemployment remaining above 7 percent until 2016, and a persistently strong Canadian dollar mean the Bank of Canada will be reluctant to raise interest rates too quickly, it said.
"Reflecting the sluggish recovery, PBO projects that the output gap will close gradually, restraining the pace of interest rate hikes by the Bank of Canada," said the report.
The PBO's fiscal outlook excludes new measures announced by the government in its March budget, which was never adopted because of the general election. The Conservatives, who won a majority on May 2, will present another budget on Monday, which they say will be largely the same as the previous document, with some minor tweaks.
The PBO sees a budget deficit in 2011-12 of C$26.1 billion, slightly below Ottawa's latest projection of C$27.8 billion.
While the Conservatives predict a return to balance in roughly 2014-15, the PBO sees a shortfall of C$13.3 billion that year and C$7.3 billion the year after.
Finance Minister Jim Flaherty responded to the PBO report by suggesting Budget Officer Kevin Page should read the March budget proposal to see how Ottawa plans to return to surplus.
"It's all set out how we would do it. It's in the budget that we filed March 22," Flaherty said.
($1= $0.98 Canadian)
Editing by Jeffrey Hodgson