Balancing the budget could take two years longer than expected: TD

But the TD Bank’s analysis taking into account new, more subdued growth projections for the economy suggests that even if Ottawa books all the savings from departmental cuts, it likely won’t be enough.

The bank calculated that Ottawa is likely to still be $5.2 billion in the hole in 2014-15, and will record a $1.8-billion deficit the following year. The surplus in 2016-17 will be an equally tiny $2.5 billion.

“The private sector consensus is for a more modest economic profile for Canada relative to where things stood,” at the time of the budget, the bank said.

“In the absence of any new fiscal restraint measures, there is a risk that the federal government will return to budgetary balance in 2016-17, two years later than previously estimated.”

The TD bank paper came two days after Finance Minister Jim Flaherty’s meeting with economists earlier this week, and a couple of weeks before the minister is due to issue the fall economic update on the fiscal picture.

Flaherty fudged when asked directly this week if the 2014 date was still the government’s target, choosing instead to say Ottawa was on track to balance “in the medium term,” which could incorporate a delay of a few years.

Whether Flaherty meets the hard target may be more a political prerequisite than an economic necessity, given that at the end of the planning horizon the annual shortfalls in the TD calculations represent a mere 0.3% and 0.1% of the size of the economy, respectively. By comparison, the 2009-10 deficit was 3.6% of GDP.

“The size of the deficit is so small as a share of the economy, it really is not a source of concern and so there is not need to introduce additional fiscal restraint,” said TD’s chief economist Craig Alexander, who met with the minister earlier in the week.

The TD analysis assumes that the government will stick to the spending restraint plan it outlined in the updated June budget, including cuts to the public service and limiting program expenditure growth to about two per cent annually. It makes allowances for the fact the actual deficit recorded in the just past fiscal year was $2.8 billion to the good of what Ottawa had expected.

It also builds in an additional $2.3 billion in total savings in mortgage payments on the national debt over five years because of expectations interest rates will stay low longer.

But it notes that expected lower growth will carve about $3 billion from Ottawa’s treasury next year, and because such losses are cumulative, the revenue shortfall will total $8 billion by 2015-16. The consensus forecast is now for growth that is seven-tenths of a point lower this year and next over what the government had counted on.

The only way to make up for the difference is through additional spending cuts – which will be difficult to realize – or higher taxes, with Flaherty has explicitly ruled out.

The TD paper said the government should do neither.

Given that the “miss” is small, “investors and markets should remain confident that a medium-term plan is firmly in place to return to surplus,” the bank said.

The economists added that this doesn’t mean the government should stop worrying about the deficit, either, saying the “bar should be set fairly high” in deciding to increase stimulus if it throws Ottawa’s fiscal plans off track.

Alexander said it is important for Ottawa to get back on a sustainable fiscal path as quickly as reasonably possible because by the mid-point of the decade, the government will be facing a new challenge – an aging workforce that will limit growth and government revenues while increasing demands on the public purse.