November 20, 2008 / 4:10 PM / 11 years ago

UPDATE 2-Policies, not crisis seen causing Canada deficit

(Adds details, reaction)

By Louise Egan

OTTAWA, Nov 20 (Reuters) - The Canadian government will run budget deficits for the first time in over a decade as the economy slides into a mild recession, the new parliamentary budget officer predicted on Thursday.

The gloomy outlook provided by Kevin Page, the budget officer, provided ammunition to the opposition Liberals, who accused Conservative Prime Minister Stephen Harper of irresponsible spending and poor economic stewardship.

“The most interesting point was the statement in black and white that this deficit is not because of a global economic situation but its entirely because of actions taken by the Harper government,” said Liberal legislator John McCallum.

“Its a made-in-Canada Stephen Harper deficit,” he said.

Based on the average forecast of private sector economists, the report forecasts a deficit of C$3.9 billion in the 2009-10 fiscal year ($3.0 billion), starting April 1, and a deficit of C$1.4 billion in 2010-11. That would be followed by small surpluses in the next two years.

The “low” forecast, which Page sees as more likely, called for deficits of between C$12 billion and C$14 billion in each of the next four years.

“Given that the balance of economic risks is tilted to the downside, our judgment is that the lower range of budget projections represents a more likely range of actual outcomes,” the report said.

Ottawa is seen running a surplus of C$4 billion in the current fiscal year, down sharply from the C$9.6 billion recorded in 2007-08 but beating the government’s own prediction of a C$2.3 billion surplus.

The idea of running a budget deficit in Canada has been political anathema since the 1990s when a previous Liberal government painfully eliminated it over a period of years. Ottawa has subsequently posted annual surpluses, the only major industrialized country to do so.

The newly re-elected Conservatives insisted throughout this year’s campaign that they would continue to balance the books. However, the government has since allowed that a temporary deficit is likely.

Page, an independent officer whose role is to inform parliamentarians, said the government has been forced by its own policies — not the global crisis — to abandon its fiscal targets, in particular its decision to twice cut the federal goods and services tax by 1 percentage point since winning the January 2006 election.

“Tax revenues are down C$353 million to date compared to a year earlier, due in large part to recent policy measures, such as the second 1 percentage point reduction in the goods and services tax and reductions in corporate income taxes.”

The projections assume the C$4 billion the government earned from a recent wireless spectrum auction would be counted as revenue over a 10-year period.

The report projected a one-year delay in reaching the government’s target of bringing the ratio of debt to gross domestic product down to 25 percent. The ratio will now fall to that level by 2012-13 instead of 2011-12, it forecast.


Page also said private-sector economists have forecast that the country was now entering recession. The downturn would be similar to that of 2001 and less severe than the recessions of the early 1980s and 1990s, he said.

He cited surveys showing gross domestic product would contract in the fourth quarter of 2008 and the first quarter of 2009. The popular definition of a recession is when GDP shrinks for two consecutive quarters.

Harper repeated on Thursday that the government will take fiscal measures to combat the global financial crisis. Page suggested that any such measures should be timed to take effect in the period of weakest economic growth in 2009. It should also be temporary to avoid deepening the deficit, and targeted to maximize benefits, he said.

Taking no fiscal action would risk prolonging the economic slowdown, he said.

$1=$1.28 Canadian Additional reporting by Randall Palmer and David Ljunggren; editing by Rob Wilson

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