October 29, 2012 / 6:18 PM / 6 years ago

Canada says commodity drop hits budget, surplus on track

OTTAWA (Reuters) - Lower commodity prices are reducing the Canadian government’s revenues, Ottawa said on Monday but forecast it will still be able to eliminate its budget deficit in the medium term.

Canada's Finance Minister Jim Flaherty pauses during a news conference in Ottawa October 18, 2012. REUTERS/Chris Wattie

Finance Minister Jim Flaherty said he expects economic growth of at least 2 percent through 2017, which was the consensus of private sector economists surveyed by his office this month. That leaves the Conservative government’s overall economic outlook through 2017 unchanged from the forecast in its March budget despite a drop in its growth outlook for 2013.

Sharp downward revisions to the nominal level of gross domestic product, which is not adjusted for inflation, for this year and next were the biggest change in the new forecasts from the government’s March outlook. The size of nominal growth has a direct impact on tax revenues.

“We know that the revenues are off. They’re not off dramatically, but they’re off a bit, and we’ll have to adjust for that,” Flaherty told reporters.

In a written statement, Flaherty said: “This will have an impact on the fiscal outlook that was presented in Economic Action Plan 2012 (the budget).”

He later downplayed that impact, which will be reflected in a fiscal update due for release later this fall. “The fiscal track is OK, we’re still on track to balance (the budget) in the medium term,” he said.

Flaherty would not say whether Ottawa still believes it will post a surplus in 2015-16 as it said in March.

Canada recovered more quickly from the last recession than did the United States and other major economies, helped by a sound banking system, robust consumer spending and a heated housing market.

Ottawa has long said that if the economy continues to expand at a modest pace, the government should return to a budget surplus - a status it held for over a decade before the recession - by 2016.

The country’s parliamentary budget office (PBO) backed up that view in a separate report on Monday. It said there was a 60 percent chance the government would run a surplus in 2015-16.

Private sector forecasters who met with Flaherty on Monday expressed little concern.

Craig Alexander, chief economist at Toronto-Dominion Bank, said the downgrade to nominal GDP growth could mean a hit to government revenues of about C$1.8 billion ($1.8 billion). But he said the government’s growth forecasts err on the side of caution, so the net effect on the budget balance was minimal.

The chief economist at Royal Bank of Canada, Craig Wright, was more upbeat. “Any surprises going forward should be to the good side, i.e. smaller deficits and a return to balance sooner rather than later,” he said.


Flaherty blamed troubles in the United States and Europe for private sector forecasts that showed just 2.1 percent growth in Canada this year, 2 percent next year and 2.5 percent in 2014.

Those forecasts are in line with a Reuters poll published on October 11, which showed economists expect growth of 2 percent this year and next.

“The October survey underlines the renewed weakness we have seen ... especially in Europe and the United States, our two largest trading partners,” Flaherty said.

The PBO was less upbeat, forecasting 1.9 percent growth this year, dropping to 1.5 percent next year before recovering to 2.0 percent in 2014.

The PBO’s view on monetary policy was also more dovish than most. It said the Bank of Canada will hold its key interest rate at the current level of 1.0 percent until 2015.

“With inflationary pressures well contained and Consumer Price Index (CPI) inflation remaining below its 2 percent target, PBO expects the Bank of Canada to maintain its policy interest rate at 1 percent through the first quarter of 2015,” it said.

The median forecast in a Reuters poll this month of primary dealers was for a rate hike in the fourth quarter of 2013.

Additional reporting by Randall Palmer; Editing by Jeffrey Hodgson; and Peter Galloway

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