OTTAWA — The federal government is playing with fire in living with a large structural deficit at a time of reduced economic potential and an aging population, the country’s budget watchdog says.
Parliamentary budget officer Kevin Page’s latest report Monday shows Ottawa will be still be stuck with a massive deficit of $18.9 billion in 2013-14, even after the economy has bounced back to health.
The projection puts him at odds, once again, with Finance Minister Jim Flaherty and Prime Minister Stephen Harper, who have insisted Ottawa will balance its books in a reasonable time through economic growth.
In most respects, Page and the government agree that economic growth will take care of much of the shortfall over the five years of his forecast — slicing the deficit from a high of $54.2 billion this year to about $19 billion in 2013-14.
But, he suggests, that the damage caused by the recession has cut into the potential of the economy to generate revenues for Ottawa going forward.
And with the baby boom generation entering a period where they will shift from taxpayers to consumers of government services, this is a cause for concern, he says.
“Relative to the size of the economy, the structural deficits projected . . . are small compared to the structural deficits of the 1980s and early 1990s,” he writes.
“However, a more thorough assessment of the sustainability of the current fiscal structure requires a longer-term perspective, in particular taking into account the fiscal challenges posed by population aging.”
Page said his office is analyzing the implications and plans a report in the next few months.
The budget officer has been a thorn in the side of the Conservatives for casting doubts on government estimates for more than a year, and this report, while more in line with Ottawa’s own published estimates, is unlikely to end the irritation.
That’s because of Page’s assertion that “without additional policy actions the budget is not projected to return to balance by 2013-14.”
In his last update delivered about a month ago, Flaherty said the deficit would be reduced to about $5 billion in 2014-15, a projection the report Monday suggests is unlikely.
By Page’s estimates, the structural deficit — defined as the underlying shortfall even after the economy has returned to normal — is growing in the outgoing years of his five-year forecast, not shrinking.
In a report that drew similar conclusions, economist Dale Orr recommended Ottawa raise the GST tax from five to six per cent for two years, an action he said would raise about $13 billion in revenues. More importantly, he said, it would make feasible Flaherty’s desire to balance the budget in 2015-16.
Both Harper and Flaherty, however, have steadfastly insisted they will not raise taxes or slash programs and transfer payments to provinces to balance the books.
Page’s new report does not differ wildly from the most recent projections issued by Ottawa.
The budget officer agrees with the government that the economy is finally emerging from a deep deficit, and has weathered the global storm better than most other industrialized countries.
Nevertheless, Page says the economy will not fully recover and return to full potential until 2013 and will have cost Canada $200 billion in lost output during that time.
Meanwhile, Ottawa will have added $167.4 billion to its debt.
Where Page and the government differ slightly is in the trend projections.
Page says the deficit this year will actually be $2 billion smaller than Flaherty’s estimate of $56 billion, but he says the latest private economic forecasts suggests the economy will grow more slowly than Ottawa assumes and hence tax revenues will be lower going forward.
As far as unemployment, the consensus of economists used by Page now says joblessness won’t be as severe as thought in June, the last time the budget officer reported on the issue.
The unemployment rate will average 8.4 per cent this year, the current level, and 8.9 per cent in 2010. The difference from June’s estimates means there will be 76,000 more Canadians working this year that previously thought, and 142,000 more in 2010.