Following the latest federal fiscal results, TD Economics forecasts that Canada could return to surplus by 2014-2015.

“While a small budget deficit of $0.9 billion was still recorded in February, this concealed the fact that revenues are quickly coming back to life after the substantial retreat earlier in the year. In light of this showing, the government is on track to record smaller deficits than it had projected at the time of the March budget,” TD says in a research note.

The firm cautions that accounting adjustments at year-end can have a significant impact on overall annual fiscal results, but it nevertheless projects that “it appears likely that the $53.8 billion deficit estimate presented in last month’s budget will ultimately get downgraded to about $46-$47 billion.”

It suggests that revenues may be about $5 billion higher than expected, and that spending could also be a little lower due to departmental expenditure “lapses” and lower-than-anticipated debt service charges. Also, the prospect of General Motors repaying its bailout loan in full could shave another $500-$750 million off TD’s projected deficit for fiscal 2009-2010, it says.

Given this new starting point, and assuming that the federal government follows through with its commitment to allow temporary stimulus programs to expire, and that it manages to contain average program spending growth to about 2% per year beginning in fiscal 2012-2013, TD’s projections slash a cumulative $34 billion off the five-year deficit profile contained in the March budget.

“Under this scenario, the debt-to-GDP ratio falls back to 30% of GDP by fiscal 2014-2015, or two percentage points lower than in the budget. Whereas the government continues to project a modest deficit of $2 billion in fiscal 2014-2015, we anticipate a slight $1 billion surplus,” it says.

“Given this razor-thin improvement five years from now, the good news in the current year cannot breed complacency. What’s more, any number of nasty economic surprises could emerge over the next half decade, potentially knocking the federal government off track,” TD cautions. “And again, the government does have to terminate the temporary stimulus plans and implement the planned spending restraint.”

IE