Parliamentary budget officer sees $48 oil creating small deficit

Parliament's budget watchdog projectsthe federal government could see its $3-billion contingency fund dissipate and run a $400-million deficit in 2015-16 if oil prices stay at an average of $48 a barrel.

But Jean-Denis Frechette says, with some minor adjustments, the government would still be in a position to balance the books in its upcoming budget.

"It may not be that difficult," Frechette said today. "They have other possibilities. They have other sources of revenue."

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The Parliamentary Budget Office suggests, for example, the federal government could sell federal assets or delay spending on certainprojects to avoid running up a deficit.

The watchdog was asked by Liberal MP John McKay to analyze theimpact of lower oil prices on projected federal surpluses through 2019-20.

The projections work through the numbers for two scenarios:

• West Texas Intermediate (WTI) staysat its recent price of $48 abarrel through theentire time period.
• WTIsits at an average of $51 for 2015and then rises gradually to $81 in 2019.

In the rosier scenario, the analysis suggests the books can show a small surplus of $700 million, assuming the contingency fundistapped.

Mobile users, view a CP graphic on the impact of oil prices here

"The path for oil prices over the next five years is uncertain," the report from Jean-Denis Frechette's office cautions.

If something resembling the first scenario comes to pass, the PBOestimates a price of $48 a barrel would reduce federal budgetary revenues by approximately $7.6 billion annually, on average, 201516 to 201920.

Overall, the federal budgetary balance would be reduced by $4.8 billion annually, on average, over201516to201920.

Estimates don't factor in declining GDP

The impact across Canada's economy would result in lower household incomes and corporate profits, the report says, which would reducethe federal government's personal and corporate income tax revenues.

But lower prices also reduce the government's expenses when it purchases goods and services, partially offsetting the lost revenue.

Spending onprograms that are indexed to inflation elderly benefit payments and the Canada child tax benefit, for examplewould be lower. Spending that'stied directly to growth in nominal GDP, like transfers to other levels of government, would also be lower.

The PBO stresses, however, that theimpacts of lower oil prices considered in its twoscenarios donot include impacts from Canada's lower real GDP that would likely materialize.

"As such, the fiscal impacts [in absolute terms]should be viewed as lower bound estimates," the report concludes.

Last week, the Bank of Canada scaled back its forecast for GDP growth, attributing low oil prices initsdecision to cut thekey overnight lending rate by a quarter of a percentage point.