Federal deficit to be eliminated a year ahead of schedule: Conference Board

OTTAWA — So long as the federal government keeps its pledge on curbing program spending, Ottawa should return to a surplus position one year ahead of schedule based on how the economy is unfolding, the Conference Board of Canada said Thursday.

"A more positive fiscal outcome now appears to be unfolding" for the federal government, according to a commentary co-authored by the board's chief economist, Glen Hodgson.

The same can't be said for Canada's provinces, the piece said, and they have difficult choices ahead in the coming years due to mounting health care costs.

In a commentary published on its board's website, Hodgson and senior economist Matthew Stewart said they anticipate that nominal GDP — which is growth unadjusted for inflation and represents the base from which government collects taxes — will surge 7.2 per cent this year, compared with the 4.9 per cent expectation in budget 2010.

"This is a very strong first step on the path to restoring fiscal balance at the federal level."

Further, the board's outlook for nominal GDP is higher than the 6.9 per cent gain other private-sector economists expect, according to the latest survey by the federal government.

Results on the budget front have, so far, been promising. Preliminary estimates from the Department of Finance indicate the budget deficit for the fiscal year just ended, 2009-10, came in nearly 13 per cent smaller than anticipated — at $46.9 billion versus the $53.8 billion expectation.

And last week, Finance reported the deficit for the first two months of the 2010-11 fiscal year fell to $4.4 billion, compared with a $7.5-billion shortfall in the comparable year-ago period. This was achieved due to a big gain in GST revenue and a drop in employment insurance benefits.

According to this year's federal budget estimates, the deficit would be whittled down to $1.8-billion by 2015 due in part to cuts in the public service, a freeze on foreign aid, limited growth in military spending and higher EI premiums. Those measures would net $17.6 billion in savings over five years.

But Hodgson and Stewart argue the government is on track to be near surplus in 2014, or a year ahead of schedule.

"If spending restraint can be kept on track, the federal government should be able to balance its books a full year earlier than projected. The federal debt-GDP ratio will peak at about 35 per cent in 2010-11 — still well within manageable levels and significantly better than every other major industrial economy."

In comparison, the International Monetary Fund has projected that the debt-to-GDP ratios for industrialized economies will reach 120 per cent by 2014, as the United States and Europe deal with the consequences from stimulus efforts and finance programs to deal with an aging population.

Canada is expected to be among advanced economies in terms of economic growth, with the Bank of Canada projecting a 3.5 per cent gain this year and 2.9 per cent expansion in 2011.

However, the board said provincial finances are not as rosy. Provinces have seen tax revenue shrink during the recession, and felt the need to match federal infrastructure spending to help kick-start their economies. As a whole, the board said, provincial governments have estimated their collective deficits to be almost $34 billion in fiscal year 2009-10, and are expected to improve slightly in 2010-11.

"Provinces are now facing some hard choices to regain fiscal health," Hodgson and Stewart said. "Structural changes will be needed in how services are delivered, given the health-care demands of an aging population and the impact of those same demographics on revenues."