Balanced budget now looks uncertain

Nationalpost.com
July 15, 2015
By Jason Fekete

The Conservative government is likely headed into the federal election campaign on the back of a small recession and may be unable to keep its promise to balance the budget in 2015, following a rocky analysis of the economy by the Bank of Canada Wednesday.

The slumping Canadian economy could prove a huge political headache for Prime Minister Stephen Harper’s Conservatives, who trumpet themselves as strong economic managers and the only political party that can be relied on going into the Oct. 19 vote.

Opposition parties charge that continued turbulence in the economy is a sign that Conservative policies aren’t working. The Liberals want Finance Minister Joe Oliver to immediately provide Canadians with an update on the state of federal finances, which they say are undoubtedly back into deficit.

The Tories, however, are looking to use the economic news to their advantage, hammering the message that external factors are to blame and that NDP Leader Tom Mulcair and Liberal Leader Justin Trudeau can’t be trusted to run the country during volatile times.

“The global economy remains fragile and is being dragged down by forces beyond our borders such as global oil prices, the European debt crisis, and China’s economic slowdown,” the Prime Minister’s Office said in an emailed statement.

“Now more than ever we must continue with our low tax plan, and not take unnecessary risks with the inexperienced leadership of Justin Trudeau. Justin Trudeau does not understand how to manage a G-7 economy.”

The statement continued: “Justin Trudeau is just not ready to be Prime Minister. Canadians will not be fooled by Thomas Mulcair. Thomas Mulcair does not even know what the business tax rate is in Canada, he just knows he wants to raise it. Thomas Mulcair is offering the same high tax, high debt policies that created the type of chaos we see in Greece today.”

The political reaction from all sides came as the central bank cut its key interest rate a quarter-point to 0.5 per cent Wednesday. It projects in its Monetary Policy Report that the Canadian economy shrank in the first half of the year.

Overall, the Bank of Canada is predicting the Canadian economy will grow by 1.1 per cent in 2015, barely half of the two-per-cent growth the Conservative government projected in its April budget.

Should this scenario play out, it could erode billions of dollars from federal revenues and turn the projected $1.4-billion surplus into a deficit. Harper’s government promised there would not be a deficit in 2015.

The federal budget forecast that a one-year, one-percentage-point decrease in real gross domestic product would erode the budget balance by $4.1 billion.

“Being in a (possible) recession, given that you’re supposed to be a good economic manager, there’s a certain accountability that goes along with that,” said pollster Darrell Bricker, CEO of Ipsos Public Affairs.

“It’s a very thin line that they (Conservatives) walk.”

Bricker said the country’s unflattering economic performance raises two separate issues for voters on the campaign trail.

One question is which party and leader Canadians think will do the best job of managing the economy during tough times, and the data show “the Conservatives win way ahead on that,” he said.

However, there’s another question of competence, he said, “and that’s where this might bite.” Governments tend not to be re-elected when they’re in recession, he said.

“What it becomes then is a litany of woes. Somebody has got to be punished and you can’t punish the opposition.”

The government also faces the prospect of going into the fall election campaign on the heels of what the Bank of Canada projects would be a technical recession.

The bank forecasts that the Canadian economy shrank at an annual rate of 0.5 per cent in the second quarter of 2015, following a 0.6-per-cent contraction in the first quarter - largely due to a significant slowdown in the oil and gas sector. But the central bank expects the economy to pick up steam in the second half of the year.

The Bank of Canada and its governor, Stephen Poloz, wouldn’t label the economy’s slowdown in the first half of the year as a “recession.” However, two consecutive quarters of shrinking GDP are usually characterized as a recession.

“It knocks a lot of holes in their (the Conservatives’) own credibility,” NDP finance critic Nathan Cullen said about the economic data.

“It has also taken what is supposed to be one of their strong cards and made it into a liability with regard to finances and the economy.”

Liberal finance critic Scott Brison argued the latest data show Harper’s economic record “is in tatters,” saying Canada is the only G7 country to be tracking into a recession in 2015.

“It’s clear these numbers drive a Mack truck through the government’s fiscal projections,” Brison added, calling for Oliver to immediately table a fiscal update. “There’s no doubt we’re in deficit.”

Bricker said Mulcair, far more than Trudeau, is best placed to gain from the Conservatives’ economic and fiscal challenges.

“When people want change, they vote for big change,” he said. “It benefits Mulcair because he’s the biggest change.”

The Conservative government is hoping its increase to the Universal Child Care Benefit - which will start landing in mailboxes across Canada Monday - will provide an economic and political boost going into the campaign.

Poloz said he expects the cheques will provide a “noticeable bump” to consumption spending in the third quarter.

Douglas Porter, chief economist at BMO Capital Markets, said he wouldn’t be shocked to see the federal government roll out some sort of spending initiatives during the federal election campaign to stimulate the Canadian economy, something he said would be “the appropriate thing to do.”

Given the stalled Canadian economy in the first half of the year, the least of the government’s worries should be trying to ensure it balances the budget with a “self-imposed” target, he said.

“I hardly see it as the number one priority to balance the books with the economy gasping to grow,” Porter said.