Global uncertainty will add to Canada's deficit, Flaherty says

A weakening global economywill result in a dramatic increase in Canada's deficit this year,Finance Minister Jim Flahertysaid Tuesday in his fall economic statement. That weakness will be persistent enough to push his goal of eliminating the deficit another year down the road.

In a speech to the Fredericton Chamber of Commerce, Flaherty said the deficit will jumpto$26.2 billion up $5.1 billion from the $21.1-billion estimate in his March budget.The fiscal books are not projected to be in a surplus position until2016-17, a year later than he had predicted.

While Canada has the best debt-to-GDP ratio among the G7 countries, Flaherty emphasized that Canada is not immune to a shaky global economy and is especially vulnerable to low commodity prices, includingthe oilfrom which Canada generates royalties.

For these reasons, Flaherty projects that nominal GDP,the broadest measure of the governments tax base,for 2012 to 2016 will be on average$25 billion, or 1.3 per cent, lower than he had estimated in last Marchs budget, a substantial drop.

However, he saidthe average outlook for economic growth of 2.3 per cent over five years is unchanged since the 2012 budget was revealed.

Budget in balance by 2016-17

Flaherty said program expenses as a share of GDP will steadily decline, and will return to pre-recession levels by 2017, largely because of the $5.2-billion cut to government spending that was the headline of his spring budget, essentially a six-year spending freeze across the federal government.

But because of declining commodity prices especially oil, which drives much of Canadas economythe government is estimating it will collect $36 billion less in royalties and tax revenues, about $7.2 billion for each ofthe next five years, than it had forecast in the last budget.

Flaherty predicted that the federal debt will resume its downward track and continue to remain the lowest in the G7.

Flaherty mentioned the European debt crisis and the looming possibility of the so-called "fiscal cliff," the combination of tax increases and reduced spending due to come into effect in the U.S. by 2013, as the chief reasons why the economic global outlook is so uncertain.

The potential for a fiscal cliff crisis is only six weeks away. Avery Shenfeld,chief economist of CIBC,noted Monday that it might have been better for Flaherty to wait four more weeks for his update, when events in the U.S. are likely to be much clearer.

Some think that even if the U.S. careens over the fiscal cliff, it willrecover relatively quickly.

Flaherty: 'The good news is we're on track'

In a news conference following his speech, Flahertyplayed down the inability to balance the budget within his government's present mandate, which ends in 2015 when the next federal election is due to take place.

Flaherty said that the $1.8-billion deficit that hisdepartment projects for the years 2015 to 2016 is a little bit less than half a per cent of the federal budget,implying it wasa fairly small number. "The good news is that we're on track."

Asked about whether his government has any contingency plans in the event of a U.S. fiscal crisis, Flahertyanswered that he has a contingency plan, but won't discuss it. He added that there is also a contingency planready if the European debt crisis were "to unravel in a disorderly way".

NDP finance critic Peggy Nash said that once again Flaherty and his government are avoiding accountability by delivering the economic update at a location far from Parliament, recalling that in October Flaherty announced his budget implementation bill in a bicycle shop.

Nash said the government was takingwhat she called a "steady as she goes" approach, while Canadians are seeing their incomes stagnate. She recalled that in 2008, just before the financial crisis that spawned a global recession, the government was assuring people that everything was fine.

The NDP has issued what it calls a "reality check," pointing out that in the past six years the Conservative government has collected more and more personal income tax from Canadians: "Revenue from personal income tax is now 3.7 times higher than from corporations."

Scott Brison, the Liberal finance critic, said that Flaherty is offering nothing about job creation for young Canadians, adding that"Mr. Flaherty has pushed the balanced budget date off for one more year. Hes been wrong on every deficit projection hes ever made and theres no reason to believe hell be right this time."

According to Craig Alexander, deputy chief economist at TD Financial Group, its still possible, if unlikely, for the government to hit its deficit target. "They actually shave down their projections by about $3 billion just in case something untowards happens. Its called a contingency reserveso they could still balance the books in 2015, but theyre not counting on it anymore."

Delaying balancing the books

For middle class Canadians, the budget-balancing delay means theyll have to wait longer for the following financial goodies promised by Flaherty as soon as government finances are in the black:

• Income-splitting for families with children under 18 years of age allowing couples to share up to $50,000 in income.
• Children's fitness tax credit to be doubled and made refundable.
• Adult fitness tax credit (up to $500 of eligible activities).
• Tax-free savings accounts to see doubling of annual eligible savings, up to $10,000.