Breaking down the Conservatives' shaky federal surplus

The Tories may be trumpeting the merits of their federal surplus, but they seem to be ignoring some underlying risks

Chris Wattie/Reuters

Chris Wattie/Reuters

Federal Finance Minister Joe Oliver stood before a packed hotel auditorium in downtown Toronto Wednesday and delivered what amounts to a key plank in the government’s re-election campaign: a budget surplus. Not much of a surplus, mind you. Only $1.9 billion. And not until next year. But according to the government’s projections, part of a fall economic and fiscal update, that figure will slowly grow to $13 billion by 2019—providing Canada doesn’t get caught up in the economic malaise affecting most of the rest of the world.

It may already be too late. Since the government conducted a survey of private sector economists in early September, the price of crude oil has fallen another 12 per cent. In response, finance department officials were forced to slash about $3 billion from their GDP forecast for 2014 and $16 billion per year going forward. As Bloomberg noted, the cumulative surplus predicted for 2015-18 has been cut nearly in half from the $33 billion forecast delivered alongside the budget back in February. Still, a surplus is a surplus.

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“It’s a prudent projection adjusted for the decline in oil prices,” Oliver told the largely Bay Street audience (assuming, of course, oil prices don’t fall any further). Oliver went on to say that the government’s handling of its finances—which includes a recently announced package of new tax cuts—was a “remarkable achievement” in the face of a shaky global economy.

It’s also true that the forces dictating Canada’s future economic performance are largely beyond Ottawa’s control. The federal government’s outlook assumes a relatively healthy U.S. economy that grows at a rate of about three per cent over the forecast period. That’s key because, other than housing, rising U.S. demand for Canadian exports appears to be that main contributor to the country’s anemic, but still positive, GDP growth, as well as a falling unemployment rate, now at 6.5 per cent. It also assumes Ottawa can continue to keep a lid on spending as it heads into an election. Already, Prime Minster Stephen Harper has announced a package of tax cuts aimed at families that have essentially tipped what might have been a surplus in the current budget year into a small $2.9-billion deficit, although that could still end up being erased because of a $3-billion contingency fund.

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It’s also worth noting that the gap between EI premiums and benefits paid out is expected to yield a $2.5-billion surplus in the account by 2015-16. A report last month by the parliamentary budget officer claimed a decision to freeze premiums at higher-than-required levels until 2017 is effectively padding the government’s books.

Equally curious is the relatively short shrift Oliver gave to some of the non-oil challenges facing the Canadian economy. In the “risk factors” section of the government’s documents, finance officials suggest that “in the U.S. the recovery appears to be gaining traction,” but they also note a troublingly consistent pattern of real U.S. GDP growth coming in below expectations every year since 2011. As for Canada, only a single paragraph is devoted to the country’s bloated household debt-to-income levels, with Canadians owing roughly $1.63 for every dollar they earn, and the country’s soaring housing market—two clear economic risks that all but consumed Oliver’s predecessor, the late Jim Flaherty. “There remains the risk that, given the ongoing low-rate environment, stronger-than-expected underlying momentum in the housing market could translate into further debt accumulation,” the document says. “As well, the lack of momentum in business investment, if maintained, would pose a downside risk to Canada’s near-term growth prospects.”

So there you have it. Oil prices are falling, Canadians are creaking with debt, house prices continue to skyrocket and businesses refuse to spend their cash hoards. But the promised federal surplus remains—at least for now.

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