Source: The Canadian Press

Ottawa’s battle to rein in record deficits could be won a full year ahead of schedule, says the Conference Board of Canada in a new analysis of how the economic recovery is impacting government finances.

The Ottawa-based think-tank’s new analysis on the nature of the economic rebound shows that Ottawa stands to eliminate the deficit – and actually post a $5-billion surplus – within five years.

That’s at least a year ahead of ahead of the plan laid out by Finance Minister Jim Flaherty in the March budget, which still saw a $1.8 billion deficit in the final year of the projection period, 2014-2015.

Flaherty’s projections received wide criticism as overly optimistic at the time. Parliamentary Budget Officer Kevin Page expressed doubt that Ottawa would ever get back to balance without additional tax increases or spending cuts.

But Conference Board economists Glen Hodgson and Matthew Stewart said much has changed since March, particularly expectations for nominal growth – different from the more commonly reported real gross domestic product in that it measures the value of output rather than the amount.

The key point is that government revenues are much more directly tied to nominal GDP by way of higher corporate tax and income tax receipts.

“Here’s the good news for the federal government,” they wrote. “The Conference Board forecasts nominal GDP growth in 2010 to exceed significantly (the) consensus view used in the federal budget.”

Stewart says while real GDP growth has only been modestly better than the budget’s expectations, nominal GDP has exploded thanks to a quick rebound in global commodity prices that has brought additional wealth into the country.

The budget had expected nominal GDP to grow at a healthy 4.9% this year, when in fact it will likely grow by 7.2%.

“The starting point right away is already going to add about $5 billion to revenues, so even if growth (going forward) is slower, it’s not hard to end up in a much better situation a couple of years out,” he explained.

The difference is dramatic. This year’s deficit will likely come in at $44 billion rather than the $49.2 billion estimated in the budget. Over the next four years, the government’s fiscal picture will be an accumulated $27.4 billion to the good of what it projected.

Already, data is pouring in that the quicker than expected rebound has dramatically improved Ottawa’s treasury.

Recent figures from the Finance Department show last year’s deficit likely totalled about $47 billion, well below the budget’s $53.8-billion estimate. And in the first two months of this year Ottawa is already $3 billion better off than was at the same point in 2009.

Stewart cautioned that the estimates assume Ottawa will stick to its spending plans, including withdrawal of stimulus after this year.

But he says that Ottawa can keep achieve its goals by reducing the size of the public service by 11,000 over the next three years.

The news is not so good for many provinces, which are being whacked by ballooning health costs. “Some provincial governments will have difficulty re-balancing their books in the foreseeable future,” the think-tank says.

The Conference Board estimates that Ontario is in a structural deficit and will need to control health costs to return to balance.