OTTAWA — Canada’s fiscal watchdog is urging greater caution on the part of Finance Minister Jim Flaherty as he prepares to hand down his first majority budget Monday.
Parliamentary Budget Officer Kevin Page said in a new report that the government may be counting on too rosy a prediction about the recovery and too much savings from cost reduction schemes.
Page, who has quarrelled with Flaherty in the past over deficit projections, also disputed the advice the minister received from private sector economists about the strength of the recovery.
Breaking with tradition, Page said his office is making its own projections about economic growth and it estimates gains of 2.2 and 2.3 per cent for 2012 and 2013, about half a point less than economic forecasts used by Flaherty.
The budget officer also believes Canada’s unemployment rate won’t fall below seven per cent until 2016, two years later than the economists’ target.
“PBO judges that the balance of risks to the private sector outlook continues to be tilted to the downside,” the report states.
“First, PBO believes there is a downside risk to the average U.S. outlook... Second, the recent strength in the Canadian dollar has outpaced the rebound in commodity prices. Third, exceptionally low interest rates have helped fuel the rebound in consumer spending, but have also helped push household indebtedness to historic highs.”
That adds up weaker exports and softer domestic demand.
As with previous reports, the watchdog continued to contend that Ottawa won’t balance the budget in four or five years — as it says it will — unless it takes additional measures to cut spending or increase taxes.
Treasury Board President Tony Clement, in charge of the government’s cost cutting efforts, took exception to the conclusion.
“He’s entitled to his opinion,” Clement said. “When you look at the policies we’ve been pursuing, we’ve met our goals and we intend to meet our goals on this.”
Bank of Montreal economist Douglas Porter, who met with Flaherty last week, was also skeptical of Page’s assertions regarding the forecasting, saying history has shown “no individual forecaster has consistently beat the consensus on growth rates.”
But others have argued that when Finance did its own forecast in the 1980s and early 1990s, its track record was better than the consensus estimates.
In an interview, Page conceded he is sticking his head out in shunning the consensus forecast of economists.
He said the consensus tool was a good idea to establish a benchmark, but independent analysis is also valuable. He said he was convinced a PBO forecast was needed when he looked at the rosy consensus outlook for the U.S. economy and compared it to the difficulties the country was encountering.
Coincidentally, the U.S. received another spate of bad economic news on the day Page was releasing his report, resulting in markets knocking more than two per cent off the value of stocks in New York and Toronto.
Earlier this week after meeting with the private sector economists, Flaherty said his upcoming budget will use essentially the same projections as in March despite a recent spate of bad economic news, particularly from the U.S.
The government has signalled it intends to balance the budget in 2014-15, using a formula that builds in some prudence to economist forecasts.
But Page is still unconvinced. He believes government spending will be greater than Flaherty lets on, and doubts the budget will be balanced even a year later. He estimates Ottawa will add $128 billion to the national debt in the next five years, well above the $93.6 billion Ottawa is projecting.