Fiscal update showing larger deficit puts federal government promises in doubt

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Federal Finance Minister Jim Flaherty takes questions after delivering his financial update at a business luncheon in Fredericton on Tuesday, Nov.13, 2012. Flaherty says Canada will miss its deficit targets in each of the next four years due to global economic weaknesses impacting commodity prices and tax revenues. THE CANADIAN PRESS/Andrew Vaughan

The Harper government has pushed back its target date for eliminating the deficit by one year, leaving open the possibility it won't be able to fulfil two key election promises on income splitting and doubling tax-free saving accounts.

Finance Minister Jim Flaherty delivered his fall economic update Tuesday, saying global economic weakness has carved into commodity prices and tax revenues.

The update showed a bottom line worse than many expected, with the deficit at $26 billion, up $5 billion from the March budget forecast.

This year's deficit would be even higher, by about $7 billion, if Flaherty hadn't hedged his bet by adding a $3 billion cushion, or margin for risk, into his budget calculations.

Flaherty also said it will take a year longer than predicted to balance the budget.

During the last election campaign, the Conservatives said they would establish the Family Tax Cut income sharing for couples with dependent children under 18 years of age. It would give spouses the choice to share up to $50,000 of their household income for federal income tax purposes.

The Conservatives promised it would be implemented during this term in office when the federal budget is balanced.

But when asked Tuesday about the program's fate, Flaherty said it will have to wait.

"Any movement on that will have to await a balanced budget," he said.

The government had also promised to double the contribution to tax-free savings accounts to $10,000 once the budget was balanced.

"Canada has clearly been affected by volatile and falling world commodity prices since the budget in late March," Flaherty said in a speech to a Fredericton business audience.

"And the forecast of private sector economists is consistent with the view that world commodity prices will remain below the level anticipated at the time of the budget."

Flaherty said the government remains on track in keeping its costs down. But the numbers show it can't overcome the lower revenues, which were first noticed in the final accounts of last year's budget period. They carry on this year and into future years.

Ottawa now projects its deficit will rise to $26 billion this fiscal year, which ends in March, as opposed to the predicted $21.1 billion. Going forward, the deficit is now projected to hit $16.5 billion next year, compared with the budget estimate of $10.2 billion, and $8.6 billion in 2014-15, as opposed to $1.3 billion.

NDP finance critic Peggy Nash accused the government of ignoring the warning signs about the weak economic conditions and squandering its revenue by giving businesses tax cuts without much benefit.

"If you are going to use tax measures to stimulate growth, you need to tie it to jobs," she said.

NDP Leader Thomas Mulcair said the decision to release the fiscal update in Fredericton instead of Ottawa shows a "profound disdain" for Parliament.

"He knows this is a break week, and instead of facing Parliament with this economic update, he's doing it away from home," Mulcair said in Victoria.

Liberal leadership candidate Justin Trudeau said the latest numbers show that the government has become too reliant on the volatile oil industry.

"If a complex and large and rich country like Canada can be thrown off a year on its deficit projections because of a decrease in the price of a single commodity — which is what happened here — then we haven't done a very good job of managing this economy," Trudeau said at the University of Toronto.

Despite the forecasts, Flaherty said he won't touch fiscal transfers to the provinces.

"We are not going to reduce transfers to other levels of government and we are not going to reduce direct payments by the Government of Canada to individuals which includes seniors, persons with disabilities, children and so on."

The March budget anticipated a $3.4 billion surplus in 2015-16, but now Flaherty expects a $1.8 billion deficit that year. The new calculation is that Ottawa will finally show a surplus of $1.7 billion in 2016-17.

The projections include a $3 billion margin of error, or so called "risk adjustment," so it is possible that Ottawa could still come in on target if those risks do not materialize, or if the economy performs better than expected.

In his speech, Flaherty cautioned that the world is full of risks and again expressed concern about a U.S. fiscal crisis if Congress and re-elected President Barack Obama cannot come to an agreement before Jan. 1.

But he also said there is some cause for optimism, in which case both the Canadian economy and government finances will improve.

"Growth in Canada could be significantly stronger than expected if the United States policy-makers are able to reach an agreement to avoid the fiscal cliff in 2013, while implementing a medium-term plan to reduce their debt and deficit," he said.

Most economists shrugged off the fiscal projections as in line with what was expected, as did markets. The dollar barely moved on the news.

Still, Flaherty cannot afford many more misses, said Bank of Montreal economist Michael Gregory, noting that last year's deficit was revised upwards a few weeks ago.

"If there's a third consecutive year of slippage without any offsetting policy response, the government’s credibility could be called into question," he said.

Gregory Thomas, the director of the Canadian Taxpayers Federation, called on Flaherty to rein in spending, accusing him of not doing enough to balance the books.

"It's time for Mr. Flaherty to take responsibility for his own budget and stop blaming others," Thomas said in a statement.

Flaherty was also asked whether the government would change the mandate of the parliamentary budget officer when Kevin Page's term expires in March. He said he'd like to see the budget watchdog provide MPs with another source of information about government budgeting, accusing Page of straying away from that role.

"The incumbent seems to have wandered from that into other areas," Flaherty said.

Last week, Page said he would not issue a mid-year report on the government's finances, citing lack of co-operation from the vast majority of departments.

At the time, Flaherty said he didn't believe Page is entitled to the information he was seeking.