Canada's long-promised economic recovery appeared to be just around the corner in September. Now October is ending and it's still around the corner. Finance Minister Jim Flaherty was advised this week he has room to cut taxes or increase spending without long-term damage to federal finances, but he should wait until the corner is actually reached before he follows that advice.
In a Sept. 18 speech in Vancouver, Bank of Canada Governor Stephen Poloz detected signs that "we may be turning the corner" into a period of economic growth. He had seen reports that some business executives were more optimistic about their prospects and the stock market was up. By Oct. 23, however, the bank's view had changed. In its rate-setting announcement and the accompanying monetary policy report, the bank lowered its 2013 Canadian GDP growth estimate to 1.6 per cent from the 1.8 per cent it was estimating in July. It lowered its 2014 growth estimate to 2.3 per cent from 2.7 per cent. The 2015 estimate was dropped to 2.6 per cent from 2.7 per cent. The corner Governor Poloz thought he was turning in September turned out to be another brick wall.
This week, the Parliamentary Budget Office issued an encouraging review of the federal finances, echoing the bank's view that the recovery is not happening yet but it will happen pretty soon. The report drops into the middle of Mr. Flaherty's preparations for a fall economic update and may reflect an Ottawa view of Canada's growth prospects and the revenue the government will harvest as a result.
World oil prices are lower than a few months ago. Since the abundance of oil production shows no sign of abating, oil prices are likely to remain low and the revenues of Canadian oil producers and governments will be reduced accordingly. Even so, according to the Parliamentary Budget Office, the government has a 50-50 chance of achieving its target of a balanced budget in 2015-16 and increasingly strong chances of balanced budgets or even surpluses in subsequent years.
According to the PBO calculations, the government could cut taxes or increase spending by an amount equal to 1.3 per cent of Canadian gross domestic product and finance the gesture off future revenues so that 75 years hence the government finances would be no worse off than they are now. Mr. Flaherty may find this encouraging news because the ruling party, now roughly halfway through the current term of office, will be eager to offer the people some tangible benefits such as a tax cut.
But the bullish estimates from the Parliamentary Budget Office need to be read in light of the real experience of recent months. The government was planning to harvest steadily growing revenues from oil exports, but the world does not need Canadian oil the way it once did. The Bank of Canada sensed the economy turning a corner, but now the corner has moved to next year.
It is possible that Mr. Flaherty will achieve his budget-balancing target, though the Parliamentary Budget Office puts the chance at only 50-50 for 2015. It is also possible the prices for Canadian oil and other commodity exports will remain low for several years and defer the expected bonanza of government revenue again and again. In the meantime, Canadians need their government to be in a strong position to borrow and spend when recessions and depressions arise, as they inevitably do sooner or later. It will do Canadians no good then to hear that Mr. Flaherty really meant to balance the budget and reduce the public debt, but external conditions prevented him from doing so.
Mr. Flaherty has been running deficits as long as he has been in office. He really means to break the habit, but the political and economic forces that produce deficits may be more powerful than his good intentions. He should wait for actual revenue growth, not just optimistic forecasts, and not give away money he doesn't have.