The federal government will not only balance the budget in 2015, it will run up a sizable surplus before the next federal election, says Finance Minister Jim Flaherty.
The minister made the pledge after meeting private-sector economists in his office Monday, and after the Parliamentary Budget Officer released his latest analysis of the books, showing a razor-thin surplus in the critical 2015-16 year.
“The plan is to budget a surplus in 2015 and not a tiny surplus,” Flaherty said. “There will be no doubt that we’re balanced in 2015.”
The distinction is significant because Prime Minister Stephen Harper is counting on a balanced budget in March 2015 — and preferably a significant surplus — to fulfil a 2011 campaign pledge to introduce income splitting for couples with children in time for the October 2015 election.
The promise was contingent on having eliminated the deficit.
To explain the unexpected surplus projection, Flaherty noted that the government signalled in the throne speech two weeks ago it intends to freeze the operating budget, thereby restraining public-service hiring and pay increases.
The minister said his officials will inform the PBO on the savings the measure will realize, as well as discuss with the budget watchdog so-called “lapses” in departmental spending, “and we’re talking substantial sums of money,” the minister said.
Last week, Flaherty reported Ottawa had realized a $7-billion windfall in the just completed 2012-13 fiscal year, reducing the deficit to $18.7 billion, rather than the previously projected $25.9 billion. About two-thirds of that windfall, or $4.9 billion, came as a result of lower departmental spending than had been allotted.
The PBO has said it will examine how much of the savings were a one-time occurrence and how much could be carried forward to future years.
In the latest report card, the PBO predicts that slower-than-anticipated economic growth and lower commodity prices will cut into government revenues, shaving some of the government’s fiscal projections.
The report forecasts Ottawa’s surplus in 2015-16 will be a mere $200 million, rather than the $800 million projected in the March budget, and that the following year’s surplus will come in at $1.7 billion, less than half what was expected.
That is not enough to pay for Ottawa’s income-splitting proposal, however. The C.D. Howe Institute has calculated allowing splitting of up to $50,000 of income among couples will cost federal coffers $2.7 billion annually, and provinces another $1.7 billion.
Flaherty issues his own updated fiscal projections in the next few weeks, but Monday’s comments suggests he is seeing a far rosier picture of the government’s books than the PBO.
Royal Bank chief economist Craig Wright, who was at the meeting with the minister, said he believes the government will have little trouble meeting the 2015 timetable, and did not rule out balancing the budget a year earlier.
The finance minister did not release the growth projections handed him by the economists, but it is doubtful they are much better than the PBO’s — 1.6 per cent this year, 2.0 per cent next. The big difference in the fiscal outlooks appear to be in savings, suggesting Flaherty intends to crack down further on spending, particularly on the public service.
Slower economic growth next year and lower-than-projected commodity prices are the key reasons for the tempered fiscal projections, says the budget office report.
“These developments have led PBO to revise down the outlook for the Canadian economy relative to its April (forecast),” the report says.
“As a result, PBO’s outlook for nominal GDP — the broadest measure of the government’s tax base — is lower, by $25 billion annually, on average, than the projection based on an average of private sector forecasts.”
As well, Flaherty’s decision to freeze employment-insurance premiums is expected to cost the treasury about $700 million over the next two years, the report states.
In its economic outlook, the budget office says it expects the jobless rate to rise slightly, and that the Bank of Canada will keep its key interest rate at one per cent through the first quarter of 2015.