Ottawa carefully monitoring impact of low oil prices ahead of fall fiscal update

OTTAWA – The federal government says it’s carefully monitoring the impact of sliding oil prices on public finances as it prepares to release its fall economic update.

Canada’s junior finance minister said Tuesday that even as tumbling energy prices eat away at tax revenues, the government still believes it can deliver a balanced budget next year.

“Any time there’s a dynamic like falling oil prices that we see happening right now globally, we monitor it very closely,” Kevin Sorenson said Tuesday in Ottawa.

“The economic update will give us a little bit better indication as to where we are.”

Sorenson’s remarks came as the Harper government plans how to introduce promised tax cuts amid economists’ concerns that low crude prices threaten to deplete Canada’s public coffers. The government is expected to release its fall fiscal update soon, although no date has been announced.

On Monday, the price of oil dipped below US$80 per barrel after a Goldman Sachs report predicted crude prices would fall to US$75 next year with expanding shale production and supplies exceeding demand.

Finance Minister Joe Oliver remained optimistic Tuesday despite the oil-price tumult, and said the Goldman Sachs prediction was “at the lower end of projections.”

“Irrespective of the number, we’re comfortable that we’re going to achieve a budgetary surplus next year and we’ll be able to follow up on our commitment to reduce taxes,” Oliver told The Canadian Press.

As a result, he said, the recent drop in oil prices won’t force the government to revisit its economic game plan.

“We constantly monitor the markets and we take into account a variety of factors — and the Canadian economy is strong,” Oliver said.

“Lower oil prices have a varied impact. On oil producers, but also on consumers and so it’s a complex matter of what the actual impact will be, because clearly there are advantages for manufacturing companies as well.”

When asked whether oil prices could affect the timing of the fall economic update, he did suggest there was some flexibility.

“Well, if accommodation has to be made, we’ll make it, but we are going to have a fall update,” Oliver said, declining to elaborate.

During the 2011 election campaign, the Conservatives pledged to reduce taxes once they had balanced the books. The promises included income-splitting for couples with children under 18 and a doubling of the annual limits for tax-free savings accounts.

Last week, the Bank of Canada’s monetary policy report examined some of the pros and cons of the sharp drop in oil prices.

The central bank anticipated benefits for consumers, but predicted the overall impact on Canada would be “negative,” reducing the country’s terms of trade as well as domestic income.

The bank also said a prolonged period of cheap oil could also discourage investment and activity in the oil industry as well as the sector’s supply chain, which stretches beyond Alberta.

On that subject, Sorenson said the government will keep an eye on the oil and gas industry as prices approach the threshold where it’s no longer worthwhile for companies to develop the resources.

“We recognize that a lot of the (tax) revenues come from people working in the oil sector and it’s a major driver,” he said.

“This is going to be a challenge … We’ll be responding in some measure to continue to have skill development like we have and to create jobs.”

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