Little chance of federal budget surplus in 2014-2015: TD report

The federal government will likely face a budget deficit for the next two fiscal years, before returning to surplus in 2017-18, TD Economicssenior economist Randall Bartlett says.

Bartlett's research note released Tuesday morningflies in the face of the governments repeated assurances that a $1.6-billionsurplus is on the way.

In mid-December, Prime Minister Stephen Harper said there was no doubt that the government will balance its budget next year.

Even with dramatically lower oil prices, said Harper, we will balance the budget.

According to Bartlett, those dramatically lower oil prices are the reason a surplus is unlikely.

Using a proprietary forecasting model, Bartlett determined that the governments fiscal outlook is actually much weaker than predicted in the fall fiscal update.

That update relied on the price of West Texas Intermediate crude oil remaining at U.S. $81 per barrel. Since then, prices have continued to fall. As of noon on Tuesday, WTI crude was trading in the U.S. $45 range.

Bartlett's analysis assumes that oil will regain some of its lost value, averaging U.S. $67.50 per barrel this year, and U.S. $80.25 next year.

Economic promises in an election year

Balancing the budget is seen as a key election-year pledge from the Harper government. The election is currently scheduled for October 19 of this year, although the government could potentially call Canada to the polls earlier.

In addition to preventing a surplus, the low price of oil could keep the government from introducing tax cuts and economic policies that would appeal to voters.

Bartlett writes it could be a challenge for the government to introduce significant new policy measures, such as enhancing the Tax Free Savings Account, in the current fiscal environment.

The government could also stick to its policy pledges without raising taxes by reducing spending in other areas, noted Bartlett. But that might be a poor long-term strategy.

"Operating expenses are currently at an all-time low as a share of the economy," writes Bartlett, "and history has shown that a prolonged low level of program spending is generally unsustainable and ultimately leads to rapid spending growth down the road."

Bartlett did acknowledge that a surplus is technically possible, if unlikely.

These expected deficits are less than the federal governments annual $3 billion setaside for contingencies, wrote Bartlett. As such, surpluses over the next couple of years cannot be ruled out.