The federal government’s economic and fiscal statement features unrealistic projections, many economists say, but they applaud new measures to aid pension plans and Canadian seniors.

There is widespread disagreement with the underlying GDP assumptions of the economic statement presented by Finance Minister Jim Flaherty on Thursday.

The statement, which predicts a budget surplus of $0.8 billion in 2008–09 and $0.1 billion in 2009–10, is based on the assumption of real GDP growth of 0.3% next year.

“The government’s underlying GDP assumption for 2009 appears optimistic in our view,” said economists at TD Bank Financial Group. They expect an average drop of 33% in commodity prices next year, and a drop in nominal GDP of as much as 2%.

Under such economic weakness, TD Bank’s director of economic analysis, Derek Burleton, does not expect the federal government to realize its projected surplus.

“Ultimately, it will be very challenging for the government to avoid a deficit during such difficult economic times, especially as pressure likely grows to ante up further stimulus in the upcoming budget,” he said.

BMO Capital Markets’ deputy chief economist Douglas Porter expects a 0.7% decline in real GDP next year.

“Applying our economic projections to Ottawa’s finances points to a deficit more like $3 billion next year, including their assumptions of budget savings and before any new additional spending measures by the federal government in next year’s budget,” he wrote in response to the fiscal statement.

Royal Bank of Canada economists, however, said the government’s expectation that Canadian growth would turn negative in the fourth quarter of this year and the first quarter of 2009 was consistent with its forecast.

“These growth numbers are broadly in line with the revised RBC forecast for the Canadian economy,” RBC economists said in response to the statement.

Most economists had called for more economic stimulus than the fiscal statement presented. Given warnings by Flaherty earlier in the week that no major stimulus would be included, however, few were surprised by the lack of stimulus measures.

“On the new measure front the update was light, as expected,” said Porter.

He applauds the government’s move to cut withdrawal requirements on RRIFs by 25% this year, as well as the extension of the period in which private pensions can make up any shortfalls.

“Both of these actions are timely and welcome,” Porter said.

RBC economists also noted the benefits of the RRIF actions. “The move helps to prevent some of the realized losses incurred from depressed asset prices,” said Mark Chandler, fixed income strategist at RBC Fixed Income Research.

IE