Budget balanced on backs of contingency fund, EI and oil

Theglobeandmail.com
April 22, 2015
By Bill Curry

The Conservative government’s long-promised return to surplus relies on a series of accounting moves that includes slashing the contingency reserve, assuming oil prices will climb and collecting billions more in Employment Insurance premiums than necessary.

While economists say it is of little significance whether federal finances are in a small deficit or small surplus, Prime Minister Stephen Harper and Finance Minister Joe Oliver have made the return to surplus a central political pledge for the Conservatives. “A promise made, a promise kept,” Mr. Oliver said in his budget speech Tuesday. “This budget is written in black ink.”

The government’s critics called it something else: economic sleight of hand.

The 2015 budget promises to climb out of deficit and post a $1.4-billion surplus in 2015-16. That is accomplished, in part, by reducing the size of the annual contingency fund from $3-billion to just $1-billion per year over the next three years. Had Ottawa maintained the contingency fund at the levels used in budgets since 2012, the forecast would show deficits running for another two years.

The government is also keeping Employment Insurance premiums at higher rates than necessary to cover the costs of annual EI benefits. The budget shows the EI account will be in surplus in 2015-16 and that surplus will grow to $5.5-billion the following year. The government says it will balance the account over time by dramatically reducing EI premiums from $1.88 per $100 of insurable earnings to $1.49 in 2017-18.

Finally, while Mr. Oliver’s November fiscal update assumed the price of North American crude would remain at the then-current price of $81 (U.S.) per barrel, the 2015 budget took a different approach. It assumes prices will rise to $75 in 2017.

The 2015 budget also assumes oil prices will average $54 in 2015 and then rise to $67 in 2016.

The stunning drop in prices cut the value of oil exports by $40-billion on an annual basis, Mr. Oliver said Tuesday, even as volumes remained broadly unchanged. And while oil prices are generally expected to rise gradually, economists also acknowledge that it is a very unpredictable commodity given the geopolitics at play. The Bank of Canada has said research shows forecasts are more reliable when they simply use the current - or spot - price for oil rather than trying to guess future prices.

A report released in March by RBC assumes an average price of $53 a barrel, which is 43 per cent lower than the average in 2014. The median of analyst estimates gathered in March by Bloomberg was $57.70 a barrel in 2015 and $71 in 2016.

Asset sales, including the recent sale of the government’s remaining shares in General Motors, also added $1-billion to Ottawa’s bottom line this year, in part because the sale took place after the fiscal year began on April 1.

Queens University economist Don Drummond, who is a former senior Finance Canada official, said the government is playing with the numbers in order to show a budget balance.