Source: The Canadian Press

The federal government’s deficit elimination plan is unsustainable and may never result in a balanced budget without raising taxes, Canada’s budget watchdog says.

The latest report from Kevin Page, the parliamentary budget officer, shows Ottawa’s deficit falling sharply from last year’s record $55.6 billion, along a similar path as the government’s projection.

But where the two diverge is that Page’s analysis never shows the deficit reaching zero.

Instead, the parliamentary budget office forecasts that in five years, when Finance Minister Jim Flaherty is projecting a $2.6-billion surplus, Canada will still have an $11 billion deficit.

By that time, Ottawa will have added over $200 billion to the national debt, the report suggests.

Page’s latest analysis is not all bad news for the Harper government. The report says this year’s shortfall may be $5 billion less than Flaherty’s estimate in last month’s economic update.

In response, Flaherty rejected Page’s analysis and noted that the International Monetary Fund had given the green light to the government’s fiscal projections last week.

“He should also take it up with the IMF,” Flaherty said.

Although neither the budget office nor the government’s estimates go beyond the five-year horizon, Page’s sees longer-term implications for his findings.

He says with Canada’s workforce aging, the government may be unable to return to surplus unless measures are taken to raise revenue, such as tax increases.

“The world doesn’t end in 2015-16,” Page said in an interview. “As you look to the longer term, I think you’ll see real upward pressure on the deficit with the current fiscal structure we have in place now.”

Page and Flaherty also disagree on whether the country has a structural deficit, which means Ottawa would still be in red ink even if the economy were back to full capacity.

The budget office calculates Ottawa’s current structural deficit at $15 billion, edging down to $10 billion in five years, meaning the government must raise additional revenues to eliminate it.

In August, Page had said a balanced budget was possible if strong growth continued uninterrupted, but since the outlook for the economy has weakened and the report now estimates only a 10% chance of the government being right.

The probability of Ottawa being in deficit in five years is about 85%, the report states.

TD Bank chief economist Craig Alexander says the discrepancy between the government and the budget office is not that great, given the size of the economy, and the uncertainties surrounding the economy.

“The most positive thing I hear from the government is they are not going to embark on another fiscal stimulus package, and the commitment to get back to a balanced budget,” he said. “Whether we get the deficit eliminated Year 4, or five or six, I do not think makes a big a difference.”

Page says the major discrepancy is not with the overall direction of the economy, or whether Ottawa will wind down stimulus spending.

But the budget officer, who has no role in government policy or administration, says he is extremely doubtful Ottawa will be able to restrain spending growth to 2% a year, or one third the level it actually grew prior to the recession.

Instead, the report substitutes a 3.2% annual spending increase, which Page arrives at by combining inflation and population growth. That is still very low by historical standards.

“To talk about program spending in the two-per-cent range, that’s not a lot of money,” he explained.

“There’s significant expenditures for aboriginal (programs), public service salaries are growing at 1.5% … we don’t know what’s in the framework for the crime bill, there’s billions of dollars there annually. Where are those big cuts going to take place?”

Page points out that Canada is in far better fiscal shape than most of the industrialized world. Even under his figures, debt to gross domestic product peaks at 32.4% in five years, about one third the ratio expected for the U.S. and many European nations.

But he said the government needs to plan for demographic changes that will sap its revenues and increase its program spending.

“Our issues are more longer term, but they are fundamental,” Page said.