PBO says Ottawa on track for balanced budget this fiscal year

The federal government may be able to finally eliminate the deficit as early as this current fiscal year, but the achievement will have come at some cost to economic growth and jobs, the country's budget watchdog says.

Parliamentary Budget Officer Jean-Denis Frechette's report estimates federal spending curbs have helped keep the government's costs in check, and will likely lead to a virtual balanced budget one year ahead of schedule in the current 2014-15 fiscal year.

"Prospects for budgetary surpluses are higher over the outlook than in (October's previous report) due to a combination of an improved economic outlook and measures in Budget 2014, in particular further planned restraint in direct program expenses," Frechette's report states.

"PBO estimates the likelihood of realizing a budgetary balance or better is approximately 50 per cent in 2014-15, and more than 60 per cent in 2015-16 and beyond."

Restraint to hurt growth

But the restraint will likely shave about 0.5 per cent from the economy by 2016 and result in about 46,000 fewer jobs, the report goes on to say.

The PBO forecasts the economy is likely to advance by 2.1 per cent this year, rising to 2.7 in 2015, and remain above its potential growth rate until 2018.

The steady growth, along with spending curbs, will likely result in a deficit of a mere $500 million during the current fiscal year a virtual balanced budget followed by a $7.8 billion surplus in fiscal year 2015-16, the PBO says.

In the March budget, the government said it expects this year's deficit to come in at $2.9 billion and pegged the 2015-16 surplus at $6.4 billion.

But the most recent accounting from the Finance Department, issued last week, suggests Ottawa is well ahead of pace in terms of deficit reduction. The report showed that Ottawa posted a $5.1 billion surplus in February the third consecutive month of surpluses slicing the deficit for the first 11 months of the year to $5.4 billion.

That puts Ottawa well on pace to beat the $16.6 billion shortfall it had projected for last year as a whole. In fact, the PBO now says the 2013-14 fiscal deficit will be about $11.6 billion, or $5 billion less than estimated in the most recent budget, once all the numbers are in.

Still, the PBO says such rosy projections are dependent on the federal government sticking to its guns in terms of restraint and not adding on new spending or introducing measures that reduce tax revenues.

Income splitting on the table

With an election coming up in the fall of 2015, the Harper Conservatives are likely to do just that, however. In the 2011 campaign, the Conservatives pledged to introduce income splitting for families once they had balanced the budget, a measure that could cost Ottawa about $2.7 billion, along with other vote-getting goodies.

Recent ministerial comments have introduced a level of uncertainty about whether the government is married to the income splitting proposal. But Finance Minister Joe Oliver has reiterated that whatever the measure's details, Canadian families will be getting further tax relief.

The surpluses could also be reduced by $2.2 and $2.8 billion in the next two years if the government were to set employment insurance rates at the break even point, rather than merely freezing them at current levels.

The PBO suggests that sticking to restraint will be difficult.

"(Direct program expenses) will face significant pressure following the planned 2014-15 cuts," the report states. "Such prolonged restraint has not been achieved in the history of modern public accounts."

Still, the PBO's own figures show that the government has some wiggle room. The office calculates that without changes, Ottawa will enjoy a series of surpluses $7.8 billion, $9.1 billion, $7.5 billion and $9.1 billion between the years 2015-16 and 2018-19.