December 16, 2014 / 5:33 PM / 5 years ago

Canada to balance books even with dramatically cheap oil

Canada's Prime Minister Stephen Harper participates in a roundtable discussion with the Retail Council of Canada in the back of a Canadian Tire retail store in Mississauga, December 11, 2014. REUTERS/Mark Blinch

OTTAWA (Reuters) - Even dramatically lower oil prices will not prevent the Canadian government from balancing its budget next year, Prime Minister Stephen Harper said on Tuesday.

“You should be under no doubt that the government will balance its budget next year. We are well within that range. Even with dramatically lower oil prices, we will balance the budget,” he told reporters in Quebec City.

“The only question will be how much flexibility we have in the short term. This will obviously reduce some of our fiscal flexibility but it will not by any means stop us from reaching a balance and at the same time...making the important investments we’ve made....”

Canada is a major oil exporter and while the government does not receive direct royalties, it derives a substantial amount of money from the sector in the form of corporate and personal income taxes, as well as through sales taxes.

While cheaper oil is expected to lower Canadian economic growth somewhat, the effect on oil producers will be offset partly by the increased spending power of consumers and businesses and by stronger demand from the United States. Economists say lower oil prices benefit the U.S. economy.

On Nov. 12, the federal government released a fiscal update projecting a surplus of C$1.9 billion in the fiscal year that starts next April, on top of a C$3 billion contingency reserve.

But it was predicated on a set of oil prices which include $81 for West Texas Intermediate, which has since fallen to around $56.

When first introduced in February, the budget assumed economic growth of 2.3 percent this year and 2.5 percent in 2015. The November update assumes growth of 2.4 percent in 2014 and 2.6 percent in 2015.

Reporting by Randall Palmer and David Ljunggren; Editing by Alan Crosby

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