Canada to update budget forecasts Tuesday, on path to surplus

Mon Nov 12, 2012 4:59pm EST

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By Louise Egan

OTTAWA, Nov 12 (Reuters) - Canada will update its budget forecasts on Tuesday in a report that may show Ottawa is slightly behind schedule in its plan for eliminating a small deficit, while also preparing a contingency plan for more stimulus in case of a U.S. fiscal disaster.

The Conservative government's finance minister, Jim Flaherty, is scheduled to deliver a speech in Fredericton, New Brunswick, on Tuesday at 1200 Eastern (1700 GMT). He will unveil the annual fall fiscal update at the same time, according to a government official who spoke on condition of anonymity.

Canada prided itself on an 11-year string of budget surpluses prior to the 2008-09 recession when it slid into deficit, partly due to stimulus spending and tax cuts.

Although the federal government's fiscal gap is now less than 2 percent of gross domestic product - tiny in relation to that of the United States or some European countries - the government sees returning to surplus as a top priority and has vowed to do so by the 2015-16 fiscal year by cutting spending and fostering economic growth.

But more recently, Flaherty has shied away from giving a precise year for reaching that goal, talking more vaguely about the "medium term" instead. In late October he said revenues had been lower than expected and that would affect the fiscal outlook. Last week he remarked that he was not obsessed about balancing the books in any particular year.

The government's latest forecast is for a deficit of C$21.1 billion in the current fiscal year.

Given the current global context, economists see little to worry about if Canada closes its fiscal gap a year or two later than planned.

Doug Porter, deputy chief economist at BMO Capital Markets, said he would only be concerned if there were "huge changes" such as deficit projections for upcoming years that are several billion dollars bigger than previously thought.

Craig Wright, chief economist at Royal Bank of Canada, even sees a chance of a surprise surplus earlier than expected if the stars align in Flaherty's favor.

"The plan will likely show the balance in 2015-16 but I would suggest the risks are to achieving balance earlier rather than later," he said.

"We are slightly more optimistic than consensus which drives our projections. As well, prudence is built into the budget and last year's deficit is modest," he said.

The country's parliamentary budget office estimated last month there was a 60 percent chance the government would run a surplus in 2015-16.

Flaherty said last week he is ready with an emergency spending plan in case the U.S. Congress and the White House do not agree on how to prevent a set of automatic tax hikes and spending cuts that would go into effect on Jan. 1 and likely plunge the country into recession.

If the worst-case scenario came into play, Flaherty would undoubtedly face resistance from hardliners in his own party who oppose big government spending. But a recent G20 commitment to not force through austerity measures if it means stifling growth would also be fresh in his mind.

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