February 2, 2010 / 6:00 PM / 8 years ago

Economists lift Canada's 2010 growth forecast

OTTAWA (Reuters) - Private-sector economists reporting to the Canadian government have raised their economic growth forecast for 2010 and predict substantially stronger growth after 2011 than the Bank of Canada expects.

The collective forecast, released by the Finance Department on Tuesday, feeds into Ottawa’s lively debate on whether it will be able to balance its budget just through growth and by ending its stimulus measures, as it has said it plans to do.

Finance Minister Jim Flaherty has been under opposition pressure to show how he can eliminate the deficit without either tax hikes or sharp spending cuts. How fast the economy can grow figures prominently in the calculus.

The average of 15 forecasts, used to prepare the budget, is for real growth in gross domestic product of 2.6 percent in 2010, up from the 2.3 percent in the government’s September update. Growth for 2011 is seen unchanged at 3.2 percent.

But the forecast for average growth for the three following years is 2.8 percent, and some of the economists who met with Flaherty suggested growth and spending restraint should eventually be enough to balance the budget.

Bank of Canada Governor Mark Carney said last month that once excess slack is taken up in the economy next year, he could not envisage growth of much more than 2 percent unless there was a marked uptick in productivity. He said restructuring in the economy limited its capacity to grow.

Doug Porter, deputy chief economist at BMO Capital Markets, told reporters that it would be feasible to balance the budget without raising taxes if there were a combination of a robust recovery and real spending restraint.

But he said it was premature to be talking of restraint because of economic uncertainty and he questioned the Canadian focus on getting out of the red within five years.

“Maybe we should ask ourselves if this is the right focus, for a balanced budget in five years,” he said, adding that any tax increase would be almost an act of desperation.

Prime Minister Stephen Harper, speaking to Conservative members of Parliament in Quebec on Tuesday, said that because the recovery was fragile, stimulus measures had to continue.

“At the same time, you have to think about exit strategies and strategies to reduce the debt at the end of the recession, and I‘m sure voters have told you this too,” Harper said.

Flaherty said he would lay out a map for balancing Ottawa’s books in his March 4 budget.

TD Securities deputy chief economist Craig Alexander said restraint measures should be looked at only if the recovery appeared entrenched.

“The markets will be looking for a five-year plan that shows how they intend to get back to a balanced budget,” he said, but added that five to seven years was more realistic.

Importantly for tax revenues, the forecasts said nominal GDP -- which includes inflated prices -- should grow at 4.9 percent this year, up from the 4.1 percent previously forecast. Nominal growth will edge up slightly to 5.4 percent in 2011 but then be somewhat smaller than originally forecast in 2012-14, the projections showed.

Editing by Peter Galloway and Rob Wilson

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