UPDATE 2-Canada deficit projection too big by billions -watchdog

Thu Nov 29, 2012 4:45pm EST

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By Louise Egan

OTTAWA, Nov 29 (Reuters) - Canada's budget watchdog said the Conservative government appears to have overstated its budget deficit by an average of C$4.7 billion ($4.74 billion) a year for the current and next three fiscal years, a finding the finance ministry disputed.

A report by the parliamentary budget officer (PBO) on Thursday assessed Finance Minister Jim Flaherty's revised budget outlook on Nov. 13, which projected federal budget deficits for this year and the following three years that were on average C$5.8 billion bigger than the government estimated in its March budget.

Flaherty said then the federal government would wipe out a small deficit in 2016-17, a year later than previously forecast. But both Flaherty and Prime Minister Stephen Harper have since contradicted their own report, pledging to balance the books before the next election in 2015.

The finance minister has said the difference is due to a C$3 billion cushion in its latest forecasts that won't be used if the economy performs well.

The PBO said on Thursday the picture painted by the government is more pessimistic than is warranted.

The watchdog's calculations - based on the same forecasts the government uses - showed higher revenue and lower program expenses than the government estimated.

The report said the federal Department of Finance did not provide the PBO with enough information about its underlying assumptions and methods to properly explain the difference.

"Given the changes to the government's economic assumptions, and excluding the impact of policy decisions, the changes to Finance Canada's fiscal outlook since Budget 2012 are somewhat larger than what its sensitivities would suggest," the report said.

The "sensitivities" refer to the estimated impact on revenue and expenses of downward revisions to nominal gross domestic product and interest rates.

The PBO said that according to its calculations, the budget balance would be lowered by C$1.1 billion this year and by a similar amount over the next three years, compared with Flaherty's report showing an average $5.8 billion downward revision.

The PBO, whose chief economist Kevin Page has frequently clashed with Flaherty, is simply ignoring the government's explanation for its revised fiscal outlook, said Flaherty's spokesman Chisholm Pothier.

"I cannot explain what Kevin Page is thinking today - one day he's saying our deficit is higher, the next day he's saying it's lower," said Pothier. "I do know he seems to enjoy the attention he generates based on whatever numbers he pulls out of the air that day."

He said the PBO's analysis failed to take into account lower-than-expected tax revenues from 2011-12 which Ottawa believes will be repeated in subsequent years.

The PBO assumed there was a one-time blip in tax revenues that wouldn't carry forward into future years, which it says is the standard budgeting practice.

The government also sees program expenses rising, rather than falling as the PBO predicts, because of the impact of lower interest rates on government employee pensions and benefits. It also said the PBO misjudged the change in public debt charges for the year 2012-13.

Some pundits have speculated that Harper wants to deliver a good news "surprise" on the budget by 2015, which might help the Conservatives get re-elected that year.

"Finance Canada does not provide sufficient information and data related to its assumptions and methods ... which would be required to conduct a thorough assessment," the PBO said.

"PBO believes that providing this information and data would significantly improve budget transparency."

Kevin Page has complained for months that the government refuses to hand over certain information that he says he needs to fulfill his mandate to advise lawmakers on budget matters.

The government says the information he wants is confidential and that Page is overstepping his bounds.

Last week Page and Thomas Mulcair, leader of the New Democratic Party - the main opposition - asked the federal court to settle the dispute by clarifying the PBO's mandate.

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