UPDATE 3-Canada sees bigger surplus in time for 2015 election

Tue Nov 12, 2013 5:47pm EST

By Nia Williams

EDMONTON Nov 12 (Reuters) - Canada is in better fiscal health than previously thought, the Conservative government said on Tuesday, predicting it would run a sizeable budget surplus in time for the 2015 federal election, the result of spending restraint and asset sales.

In its fall fiscal update, the finance ministry estimated a surplus of C$3.7 billion ($3.5 billion) in the 2015-16 fiscal year, up from its March 2013 forecast of an C$800 million surplus.

The figures include a C$3 billion cushion for risk, which means the underlying surplus could be that much bigger.

The fiscal outlook has brightened because weaker revenues have been more than offset by lower program spending as well as the expected effects of asset sales and a two-year freeze on departmental operating budgets.

The positive turn is good news for Prime Minister Stephen Harper, who promised in the 2011 election campaign to introduce personal income tax cuts estimated to cost C$2.5 billion a year once the budget is balanced. The government is expected to revive that promise in hopes of getting re-elected in October 2015.

"Our plan was always to get to a balanced budget in 2015/16 to create room so that other initiatives can be undertaken, whatever they are," Finance Minister Jim Flaherty told reporters after delivering the report.

Canada's federal budget deficits have paled in comparison with those of the United States, even adjusting for the fact that the U.S. economy is nine times as big. Washington posted a $680 billion gap for the fiscal year that ended in September.

Canada had run 11 straight surpluses before tipping into deficit in 2008/09 as the result of Conservative tax cuts and then the global recession. The deficit peaked at C$55.6 billion in 2009/10 because of major stimulus spending.

"Bottom Line: Ottawa has managed to keep its finances on the straight and narrow through a prolonged period of sluggish growth," said Bank of Montreal chief economist Doug Porter. It is now "within striking distance of balancing the books a year early," he said.

But Canada's economy has been choppy this year and on Tuesday the government cut its forecast for nominal gross domestic product, the broadest measure of the tax base, for this year and next, and warned of risks to the U.S. and global economies.

It now sees the economy growing 4.2 percent in 2014 before accounting for inflation, down from the 4.7 percent it forecast in March.

ASSET SALES

Ottawa's bottom line will get some help from the sale of its remaining shares in General Motors Co, which at today's prices could bring in C$2.6 billion in extra revenues. Ottawa has already booked a gain of C$700 million this fiscal year from the sale of a portion of its shares in the automaker, which it bailed out during the recession.

The fiscal outlook uses conservative estimates and books a combined C$2 billion gain over two years from the expected sale of GM shares as well as from the sale of a bulk coal terminal and some coal blocks in British Columbia.

Flaherty said he might also consider the possible sale of Ottawa's 8.5 stake in the Hibernia oil project, off the Atlantic Coast of Newfoundland.

"Certainly we're open to discussions about Hibernia," Flaherty told reporters after delivering the report. He declined to say how much such a sale might raise.

IMPACT OF ALBERTA FLOOD

Ottawa projects a smaller-than-expected deficit of C$17.9 billion in the current fiscal year, or 1.0 percent of GDP, down from its March budget estimate of a C$18.7 billion shortfall. The deficit estimate has shrunk even though the government booked C$2.8 billion in disaster relief for flooding in Alberta in June.

For 2014/15, it forecasts a deficit of C$5.5 billion, compared with C$6.6 billion previously.

Program expenses are seen declining to 12.4 percent of GDP by 2018/19 from the current 13.6 percent, while revenues are projected to rise slightly in the same period to 14.4 percent of GDP from 14.2 percent.

The ratio of debt to GDP is slated to shrink to 25 percent in 2021 from 33.1 percent now.

High household debt remains the main domestic risk to the outlook, the government said. "While the pace of household credit growth has continued to slow, the recent pickup in housing market activity, if it reflects stronger underlying momentum, could translate into further debt accumulation," the ministry said.

Flaherty has taken steps to cool down Canada's housing market, and said on Tuesday he would intervene again if needed.

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