Economic woes sow doubt about Conservative pledge to avoid deficit

theglobeandmail.com
July 22, 2015
By Steven Chase

The Canadian dollar has sunk to its lowest level in nearly 11 years against its U.S. counterpart, dragged down by sliding oil prices that are part of an economic slump that threatens a core Conservative political promise.

The loonie closed at just over 76 cents (U.S.) on Wednesday, its weakest value against the U.S. currency since September, 2004. Evidence suggests Canada’s economy stalled, if not contracted, in the first half of 2015.

The latest bad financial news comes as Prime Minister Stephen Harper prepares to fight an election campaign on his credentials as a good steward of the economy and as Parliament’s budget watchdog warns the federal government is headed for a deficit this year. The fresh financial assessment sows doubt about the Conservatives’ centrepiece pledge to balance the books in 2015 and their competence as economic managers.

The Parliamentary Budget Officer says calculations using the Bank of Canada’s latest economic forecast show Ottawa is on track to dip into the red by about $1-billion in the 2015-16 fiscal year.

This bleaker prediction was immediately rejected by the government, which insists it will avoid a deficit this year even after it doled out $3-billion in enriched child-care benefits this week.

The Tories have invested a lot of political capital in their pledge to balance the budget in 2015 even as economists suggested the government should run deficits to stimulate the economy. They are also relying heavily on their credentials as stewards of the economy in their campaign for re-election in the fall.

The Tories cautioned that the Parliamentary Budget Officer, a post they created after winning power in 2006, is “just one voice,” and that Finance Department numbers show they “remain on track for a balanced budget in 2015.”

Rob Nicol, director of communications in the Prime Minister’s Office, pointed to a new update on federal finances issued on Wednesday that shows Canada is running a surplus of nearly $4-billion just two months into this fiscal year, which began on April 1. Last year at this time, Ottawa had a deficit of $1.1-billion. “We included room in the budget to account for continuing weakness in the global economy,” Mr. Nicol said.

However, these latest results include a one-time gain of $2.1-billion from a sale of General Motors shares that opposition parties charge was timed to help bolster Ottawa’s bottom line in an election year. The Conservatives note that the government’s fiscal situation, even after subtracting the $2.1-billion for the auto stake sale, is still improved from 2014.

Opposition parties said the deficit forecast proves the Conservatives have mismanaged federal finances.

“This is further evidence that Stephen Harper’s plan isn’t working - shrinking GDP, private-sector job losses, record household debt - and now a budget deficit,” NDP finance critic Nathan Cullen said. “The Conservatives staked their whole brand on a balanced budget while slashing services for Canadians, but they failed to build a balanced economy and will leave Canadians with another budget deficit.”

The PMO suggested an NDP government would transform Canada into an indebted basket case. “[NDP Leader] Thomas Mulcair is offering the same high-tax, high-debt policies that created the type of chaos we see in Greece today,” Mr. Nicol said.

Mr. Mulcair has been exploiting the negative economic indicators in his pre-election campaigning, selling his message in Conservative-held ridings that the problems can be traced to poor management by Mr. Harper.

On Tuesday, he was at a dairy farm in Southwestern Ontario, where he promised an NDP government would maintain the supply management system.

An NDP strategist said Mr. Mulcair is “on the offence,” targeting small businesses, manufacturing and auto sectors for disaffected voters.

The New Democrats say they believe many small-c conservatives are concerned about economic trends and can be shaken loose from the Tories. The party has directed Internet ads at suburban mothers in Ontario and men in Western Canada – demographics that leaned heavily to the Tories but that the NDP say could be vulnerable if the economy is the leading issue.

Economists cautioned against drawing too much from the PBO report, saying it is very difficult to make precise forecasts for a fiscal year that will not end until March 31, 2016.

The Conservatives said Ottawa will run a surplus of $1.4-billion in 2015-16, and $1.7-billion in 2016-17.

The Parliamentary Budget Officer, using the Bank of Canada’s new projections for downgraded economic growth in 2015, said the government will have a deficit of $1-billion this year and head back into the black only in 2016-17, with a surplus of $600-million.

Doug Porter, chief economist for the Bank of Montreal, said it is difficult at this point in the fiscal year to pinpoint the year-end result for Ottawa’s books. “Frankly, I think it’s laughably too early to be that precise.”

It would be more reasonable to say Ottawa will run a $1-billion deficit, give or take $10-billion, he said.

Mr. Porter said the markets do not care about the relatively small difference between Ottawa’s official forecast and the PBO’s prediction. “I think from a financial-markets standpoint, it simply does not matter if the budget is in surplus by a billion dollars or in deficit by a billion dollars.”