January 27, 2015 / 3:13 PM / 5 years ago

Canada may face 2015/16 budget deficit on low oil - budget watchdog

OTTAWA (Reuters) - If the price of oil averages $48 a barrel this year, Canada will end up with a small deficit in 2015-16, even with the use of a contingency fund set aside for unexpected events, Canada’s budget watchdog said on Tuesday.

A man fills up his car at a petrol station in Rome January 6, 2015. REUTERS/Max Rossi

The government has forecast a surplus for the fiscal year ending March 31, 2016.

The fiscal impact of the recent plunge in the price of oil, a major export for Canada, will depend on how long prices stay low and the cause of the declines, a report from the Office of the Parliamentary Budget Officer (PBO) said.

The report laid out two scenarios: the first in which the price of U.S. crude oil averages $48 a barrel in 2015, and the second with oil at $51 a barrel, rising to an average of $60 in 2016. Both projections were slightly above current market prices, with crude trading around $45 a barrel on Tuesday.

Under the first scenario, the lower oil price would more than exhaust the C$3 billion ($2.4 billion) contingency fund for 2015-16 and result in a small budget deficit of C$400 million. In the second scenario, a surplus of C$700 million would be managed, including the contingency fund.

In its fiscal update last November, the government had forecast a surplus of C$1.9 billion for 2015-16, plus the C$3 billion contingency. That had been based on oil prices remaining at $81 a barrel.

Finance Minister Joe Oliver will not unveil the budget until at least April this year, later than usual due to market volatility.

The Bank of Canada surprised markets with its decision to cut interest rates last week, citing a threat to economic growth and its inflation targets from the slide in oil prices. Oil has shed more than 60 percent since June.

For the current fiscal year ending March 31, the PBO forecast the government will run a budget deficit of C$1.2 billion, taking the contingency fund into account and based on an oil price of $93 in 2014.

The government has projected a deficit of C$2.9 billion without the contingency fund, giving it an underlying surplus of C$100 million for 2014-15.

($1 = 1.2442 Canadian dollars)

Reporting by Leah Schnurr; Editing by Jeffrey Benkoe

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