* Lower commodity prices hit government revenues
* 2012-16 growth profile unchanged despite weaker 2013
* Budget officer, gov't see balanced budget in medium term
* Budget officer sees Canadian rates on hold until 2015
By Louise Egan
OTTAWA, Oct 29 Lower commodity prices are
reducing the Canadian government's revenues, Ottawa said on
Monday but forecast it will still be able to eliminate its
budget deficit in the medium term.
Finance Minister Jim Flaherty said he expects economic
growth of at least 2 percent through 2017, which was the
consensus of private sector economists surveyed by his office
this month. That leaves the Conservative government's overall
economic outlook through 2017 unchanged from the forecast in its
March budget despite a drop in its growth outlook for 2013.
Sharp downward revisions to the nominal level of gross
domestic product, which is not adjusted for inflation, for this
year and next were the biggest change in the new forecasts from
the government's March outlook. The size of nominal growth has a
direct impact on tax revenues.
"We know that the revenues are off. They're not off
dramatically, but they're off a bit, and we'll have to adjust
for that," Flaherty told reporters.
In a written statement, Flaherty said: "This will have an
impact on the fiscal outlook that was presented in Economic
Action Plan 2012 (the budget)."
He later downplayed that impact, which will be reflected in
a fiscal update due for release later this fall. "The fiscal
track is OK, we're still on track to balance (the budget) in the
medium term," he said.
Flaherty would not say whether Ottawa still believes it will
post a surplus in 2015-16 as it said in March.
Canada recovered more quickly from the last recession than
did the United States and other major economies, helped by a
sound banking system, robust consumer spending and a heated
Ottawa has long said that if the economy continues to expand
at a modest pace, the government should return to a budget
surplus - a status it held for over a decade before the
recession - by 2016.
The country's parliamentary budget office (PBO) backed up
that view in a separate report on Monday. It said there was a 60
percent chance the government would run a surplus in 2015-16.
Private sector forecasters who met with Flaherty on Monday
expressed little concern.
Craig Alexander, chief economist at Toronto-Dominion Bank,
said the downgrade to nominal GDP growth could mean a hit to
government revenues of about C$1.8 billion ($1.8 billion). But
he said the government's growth forecasts err on the side of
caution, so the net effect on the budget balance was minimal.
The chief economist at Royal Bank of Canada, Craig Wright,
was more upbeat. "Any surprises going forward should be to the
good side, i.e. smaller deficits and a return to balance sooner
rather than later," he said.
RATES ON HOLD
Flaherty blamed troubles in the United States and Europe for
private sector forecasts that showed just 2.1 percent growth in
Canada this year, 2 percent next year and 2.5 percent in 2014.
Those forecasts are in line with a Reuters poll published on
Oct. 11, which showed economists expect growth of 2 percent this
year and next.
"The October survey underlines the renewed weakness we have
seen ... especially in Europe and the United States, our two
largest trading partners," Flaherty said.
The PBO was less upbeat, forecasting 1.9 percent growth this
year, dropping to 1.5 percent next year before recovering to 2.0
percent in 2014.
The PBO's view on monetary policy was also more dovish than
most. It said the Bank of Canada will hold its key interest rate
at the current level of 1.0 percent until 2015.
"With inflationary pressures well contained and Consumer
Price Index (CPI) inflation remaining below its 2 percent
target, PBO expects the Bank of Canada to maintain its policy
interest rate at 1 percent through the first quarter
of 2015," it said.
The median forecast in a Reuters poll this month of primary
dealers was for a rate hike in the fourth quarter of 2013.