Budget watchdog says Ottawa is stuck with $19 billion structural deficit

OTTAWA — The federal government will face a $19-billion structural deficit in the coming years that can only be overcome by taking dramatic action on taxes and spending, Canada’s budget watchdog warns.

OTTAWA — The federal government will face a $19-billion structural deficit in the coming years that can only be overcome by taking dramatic action on taxes and spending, Canada’s budget watchdog warns.

In his latest report on Ottawa’s deteriorating fiscal position, Kevin Page said the government cannot balance the books by simply hoping for economic growth.

With Canada’s population aging, the ability of the economy to grow and Ottawa to raise funds through taxes is being crimped, resulting in the current recession-driven deficit to become a chronic $18.9-billion shortfall by 2013-14.

As well, years of tax cuts — most significantly the cut to the GST, but also to corporate taxes — has left Ottawa without the cushion to withstand downturns without falling into deficit.

The most eye-opening element of the report is that the government’s structural deficit will grow, rather than shrink, even during the years the Canadian economy is expected to expand.

“We’re also saying, unfortunately, ‘You’ve got to start dealing with a structural fiscal problem that is going to get bigger and bigger and bigger,” Page said.

Prime Minister Stephen Harper and Finance Minister Jim Flaherty have been mostly silently of late about when the government intends to return to balance, although they have said they would not raise taxes or cut programs drastically.

But both have talked about letting growth take care of the deficit problem, which will add $165 billion to the national debt in five years.

In an email, Finance spokesman Chisholm Pothier said the government still believes “Canada will be in surplus position going forward,” noting that half the current $56-billion deficit is temporary stimulus measures set to end.

“Should the deficit persist, we will restrain the rate of growth of discretionary program spending,” he added.

But Page said finding $20 billion in discretionary spending will be near impossible, noting the government hasn’t demonstrated an ability to curtail spending to date.

Liberal finance critic John McCallum accused the Conservatives of being dishonest in saying they won’t raise taxes or cut transfers to the provinces — as the Liberals did in the 1990s to reign in the deficit.

The NDP’s Thomas Mulcair called on the Flaherty to cancel planned corporate tax cuts from the current 18 per cent to 15 per cent, a move he said could save $6.3 billion.

“It’s complete folly to keep reducing corporate taxes and keep removing the fiscal manoeuvring room of the government with nothing in return,” he said.

While most of the Parliamentary Budget Office projections are similar to the governments, Page’s main contribution to the debate is to highlight how much of the deficit will remain once the economy has recovered.

Page said the current budget deficit of about $56 billion is cyclical — that is, it is being driven by temporary factors such as the recession and Ottawa’s decision to ramp up spending to stimulate the economy.

But the bigger problem going forward is a structural one, where government revenues will continue to shrink relative to the past even when the economy is operating back at full capacity in 2013.

That’s where the PBO and the government diverge.

In 2012-13, Page estimates the deficit at $23 billion, with $17-billion structural. The government’s estimate, which does admit any as structural, is for an $11-billion deficit

The following year, when the economy is back firing on all cylinders, Page still projects a $19-billion deficit, all structural, whereas the government believes the shortfall will fall to $5 billion.

Although he does not go past 2013-14, Page says all factors point to an even greater structural deficit beyond the five-year planning horizon.

Page urged the government to come clean with Canadians on whether it plans to pass on debt indefinitely to future generations, or if it has a plan to get back to balance.

Even at $19 billion, such a structural deficit represents about one per cent of gross domestic product and is manageable, unlike the deficits of the 1980s and early ’90s, he said.

Bank of Montreal economist Douglas Porter said he doubts the government’s top priority is planning for a balanced budget years in the future, given the high 8.5 per cent jobless rate and struggling economy.

“I think first and foremost we have to make sure the recovery takes hold,” he said, adding that Japan made a critical mistake in the 1990s in tightening prematurely. And he cautioned five-year projections of growth, whether from Page, the government or private sector forecasters, can be wildly off.

Page conceded that a deficit of one per cent of GDP is “not a big problem,” but said the government needs to prepare for future risks, and the fact that a new, smaller economy is emerging from the recession.

Canada’s population is aging, said Page, and more and more Canadians are moving from producers who pay taxes, to retirees who drain government services, from medicare to old age security.

As a result, he said, the economy’s growth potential will fall from the current two per cent to 1.7 per cent in 2014, which means fewer tax revenues.

According to the budget office, labour’s input to potential growth in Canada slides from 1.4 per cent in 2008 to 0.5 per cent in 2014, and will continue to fall after that.

“If they decide they want to have a balance budget in five years, we’re saying they have to raise taxes, and they have to cut spending. If they say they can live with a structural deficit, then they could operate based on that assumption,” Page said.

“The question is what happens once we get beyond five years with the aging demographics?” Page added. “If we deal with it sooner, it’s a much easier problem to solve.”

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