Ottawa should be wary of turning surplus into tax cuts: budget watchdog

Canada’s budget watchdog says the country is on track to run a $3.6-billion surplus in 2014-15, delivering a balanced budget a year earlier than government predictions.

OTTAWA — Canada’s budget watchdog says the country is on track to run a $3.6-billion surplus in 2014-15, delivering a balanced budget a year earlier than government predictions.

However, a report released Tuesday by Parliamentary Budget Officer Jean-Denis Frechette urges Ottawa to proceed with caution when it comes to using surplus cash on new spending initiatives or to introduce permanent tax cuts.

If not, Frechette warns the government risks falling back into deficit once economic growth slows.

The Harper government has pledged to cut taxes ahead of next year’s election — long-promised reductions contingent on a balanced budget.

“Policy-makers should be wary of using surpluses to implement permanent tax relief or spending initiatives if they wish to avoid returning to deficits as economic growth subsides,” said the PBO’s latest economic and fiscal outlook.

The budget office predicts balanced budgets through 2019-20 when it says the federal surplus will reach as high as $11.3 billion. During that time, it expects average annual surpluses of about $10 billion, which can be used for repaying debt, boosting program spending and cutting taxes.

Frechette’s projection, however, for 2014-15 is at odds with Prime Minister Stephen Harper, who has insisted there won’t be a federal surplus until the 2015-16 fiscal year.

The Conservative government has pledged to reduce taxes once the books are balanced, with programs such as income splitting for couples with children under 18 and a doubling of the annual limits for tax-free savings accounts.

Earlier this month, Harper said last year’s federal deficit — for 2013-14 — would be more than $10 billion smaller than forecast, but he’s refused to predict the improving bottom line will pull Canada out of the red this fiscal year.

He announced a new $5.2-billion deficit figure for 2013-14 — down from the $16.6 billion shortfall projected in February’s federal budget.

Economists and budget watchers had already calculated that Ottawa might be headed to a surplus this fiscal year, which ends next March 31, before the prime minister’s announcement.

Last month, former senior Finance Department bureaucrats Scott Clark and Peter DeVries published a report that found Ottawa heading for a $4 billion surplus, which did not include a $3-billion “risk adjustment” cushion built into the 2014 federal budget. They based their estimates on last year’s deficit falling to about $10 billion.

Canada’s economic outlook has improved faster than expected in recent months, the budget office report said.

It found the country’s real GDP was stronger than expected and it predicts further growth due to the improving U.S. economy.

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