Weak economy? Not a problem for balancing budget by 2015, says Flaherty

OTTAWA – The federal government will take a “significant” hit from Canada’s weaker economic growth prospects, but will still be able to balance the books in time for the next election in 2015, Finance Minister Jim Flaherty said Friday.

Flaherty delivered the message after meeting with about a dozen private sector economists who travelled to Ottawa to warn that 2013 will be weaker than expected.

The government did not release a new consensus figure, but interviews with the economists showed their projections range from a low of 1.5 per cent to a high of 1.8 per cent. That’s below the two per cent advance Ottawa had counted on for the November update and well south of the 2.4 per cent projection contained in last spring’s budget.

“How much of a kick are we going to take on the revenue side because of lower nominal GDP? Significant. It’s significant,” said Flaherty during a question-and-answer period.

Still, the minister said the government is on track to balance the budget by the fall of 2015 and plans to close tax loopholes, like foreign havens used by people to avoid taxes.

It also plans on controlling spending to make up the difference.

“We will manage it,” said Flaherty. “The key is looking forward to the next two years and making sure we stay on track. There’s a number of measures we can take to do that and you’ll see them in the budget.”

The minister has talked before about cutting discretionary spending to realize his target, and he repeated the message Friday, saying he will “focus like a laser” on the spending he can control. He insisted he will not raise taxes or cut transfers to provinces.

Economists who spoke after the minister said they did not believe mild austerity from Ottawa will damage the recovery, but most appeared against anything drastic.

“Given the fact that a lot of the provinces are moving into pretty serious restraint, it probably would be unwise for the federal government to step on the brake further than they already have,” said Bank of Montreal chief economist Doug Porter.

NDP finance critic Peggy Nash said the government should be aiming to stimulate the economy, rather than introduce “more reckless cuts.” She noted that Canada’s current growth rate is the lowest since the recession.

There is no compelling economic necessity to hit the 2015 target as long as the deficit keeps decreasing, the analysts said, but that might be a hard political pill for the government to swallow.

Prime Minister Stephen Harper campaigned in 2011 on the promise to introduce partial income-splitting to reduce taxes on families, as well as to double the popular tax-free savings accounts, but only once the deficit is eliminated. Politically, the Conservatives would much prefer to campaign on a promise fulfilled than a promise closer to being fulfilled in 2015.

CIBC chief economist Avery Shenfeld said he believes Flaherty can meet his target if the economy behaves. He said the real weakness occurred in the last half of 2012 — when growth fell to an average 0.7 per cent annualized — but that he expects a better 2013 and 2014 once the global recovery, and the U.S. in particular, picks up steam.

That is in keeping with the latest indicators, including a report that both Canada and the U.S. had a stellar job creation month in February, adding 50,700 and 236,000 workers respectively.

“The real challenge will be for Canada if the global economy doesn’t pick up by 2014,” warned Shenfeld. “We’re going to depend on the kindness of strangers… we need the rest of the world to be growing faster to push business investment spending in areas like resources.”

With little money in hand, Flaherty’s budget will more likely be one of fine tuning rather than dramatic new programs or shifts in direction.

One area of priority, said the minister, will be making sure Ottawa gets better results for the approximately $2.5 billion it transfers to provinces and territories for skills training.

Despite about 1.3 million people actively looking for work, and an unemployment rate of seven per cent, there are still jobs going wanting in the resource industries of Alberta and Saskatchewan, and even in some industries in Ontario.

Flaherty has highlighted in the past the need to train Canadians for the jobs that are available, but Friday appeared to shoot down some media reports he was about to take back the responsibility for skills training and the money that goes with it. Instead, he suggested Ottawa would become more interventionist in how the programs are administered, and demand accountability.

“I think it’s important we work with the provinces and territories on skills training broadly defined,” he said. “Having said that, there’s no question that the delivery of those kinds of services generally are better placed with the provinces and territories.

“What we are looking at though is outcomes. Are we seeing the kind of employment and outcomes that we expected to see, what is the degree of accountability? We’ve got to do a better job of connecting the skills people have, the education people have, with the jobs that are available in Canada.”

Experts on the issue have tended to identify the proliferation of liberal arts courses offered at Canadians universities, as opposed to scientific and technical training, as the major reason for the skills mismatch in the labour force, rather than specific add-on training offered by provinces.

TD Bank chief economist Craig Alexander said certain groups in the country are woefully under-represented in the labour market, including youth, immigrants and Aboriginal Canadians. But it shouldn’t just be up to governments to solve the problem, he added.

“When you hear the business community constantly harping on the fact the university system isn’t generating the workers with the skills they need, at some point the answer is businesses also have to do their part.”

Flaherty said Canadians will need to wait for the budget, expected in late March, for specific details on his approach. The one certainty, he said, is that Ottawa will not cut funding for skills training.

“It’s too important,” he said. “It’s a priority of the budget.”