Flaherty to double down on spending cuts

Real domestic product output inched forward by a mere 0.6% in the fourth quarter, following an equally soft 0.7% in the third. For the year, the economy grew by an average of 1.8%.

With private sector economists arriving in Ottawa next week to give Flaherty a new forecast for the upcoming federal budget, the minister said he fully expects to be receiving more bad news.

“So what do we do with all that? Well we work harder. We find savings. It is not an option, quite frankly, to move away from our economic action plan,” he said.

“We start from the premise that we’re going to balance the budget in 2015 and it may need some more sacrifice in budgeting among various ministries of the government.”

He ruled out stimulus, which he referred to as “risky spending schemes.”

The response drew sharp criticism from NDP caucus chair Guy Caron, who accused the government of setting a political target for eliminating the deficit without regard to the consequences.

Caron said the economy would have been stronger at this point in the recovery if Ottawa had invested in needed infrastructure construction and not been as aggressive to cut corporate taxes, which he said realized only minimal gains.

“If we are going further into austerity, it will definitely have an impact on growth,” he said. “There’s nothing wrong with balancing the budget, but we want to see it over the economic cycle, not with arbitrary targets.”

In the last election, Prime Minister Stephen Harper pledged to introduce partial income-splitting for tax purposes and to double the popular tax savings scheme, but only once the budget is balanced. Achieving the goal would allow the Conservatives to campaign in the fall of 2015 on their record for fiscal prudence while also being in position to offer Canadians a measure of tax relief.

Flaherty would not be specific Friday on what would be cut, but suggested the government can close some tax loopholes and may also look at program spending, including trimming programs that are no longer a high priority.

He said the cuts won’t impact transfers to provinces.

Although Flaherty took some solace that the fourth quarter result still placed Canada at the top of the list among Group of Seven countries, he conceded the performance was at best, modest, and would cut into Ottawa’s revenues.

What’s more, he said he fully expects to have to shave his expectations for growth moving forward, particularly for this year.

Bank of Montreal economist Doug Porter said he now believes growth this year will fall somewhere between one and 1.5%. That is significantly lower than the two-per-cent outlook the analysts had in November, and the 2.4% forecast the minister used in the 2012 budget last spring.

More troubling for Ottawa is the downgrade on nominal GDP, which includes inflation and is closely tied to revenue. Last spring’s budget had counted on nominal growth of 4.6%, but Statistics Canada said inflation included GDP rose only 3.1% in 2012, and 1.9% in the fourth quarter.

Also impacting government revenues has been the relatively low prices Canada is realizing from its exports of Alberta crude, primarily attributed to refinery and pipeline bottlenecks.

The sickly fourth quarter production numbers were about half of what the Bank of Canada had predicted in January, and about one-quarter what it had said was likely in October.

Still, Porter and others cautioned the results could have been worse, and in fact expressed relief that most of the weakness in the fourth quarter was due to a $10.3-billion inventory write-down, rather than from a consumption collapse.

“Obviously the headline is pretty sour, but the details aren’t terrible,” said Porter.

“There are actually some slivers of good news. Things like consumer spending and business investment and even net exports were a little bit better than expected. It suggests the economy is still grinding ahead slowly but surely.”

The markets also saw it that way. The Canadian dollar was down initially on the news but quickly recovered. It was up 0.4 of a cent to 97.36 cents US at the close.

The fourth-quarter weakness was mostly due to a steep write-down in inventories, likely caused by business wariness over the fiscal cliff negotiations in the United States, which weren’t settled until the final day of December.

Minus inventories, final sales advanced a strong 3.2% during the quarter annualized, as gross exports rose by 1.2%, consumption by 2.7%, business investment by 2.9% and government capital spending by 2.4%.