With 2015 deficit goal in sight, Flaherty seeks out tax cheats, hopes for growth

A strong rebound in the economy, no slackening the leash on spending and succeeding in ferreting out tax cheats will all be required to turn Flaherty's financial blueprint into reality.

OTTAWA – The new federal budget keeps the Harper government’s Holy Grail of eliminating the deficit in time for the next election within reach, but getting there will now depend as much on good fortune as on a good road map.

Given the softening economy in the latter half of last year and first months of 2013, Finance Minister Jim Flaherty’s target of getting back to balance by 2015 — after piling up $172 billion in debt in eight years — will depend on three assumptions all coming to good.

A strong rebound in the economy, no slackening the leash on spending and succeeding in ferreting out tax cheats will all be required to turn Flaherty’s financial blueprint into reality.

The thin margin for error is made clear by looking at deficit projections from now until 2015-16, the year the finance minister experts to table a spring budget showing black at the end of the year instead of red.

This year’s deficit is now projected to total $25.9 billion, virtually unchanged from last year.

Then things get interesting.

According to government calculations, the fiscal shortfall improves by $7.2 billion next year, $12.1 billion the next and $7.4 billion in the year after that, landing on the narrowest of surplus ledges with a $800 million in 2015-16.

That’s a bumpier track than Flaherty had laid out at this time last year, when the annual improvement was more gradual and the target year was more firmly in the black at a surplus of $3.4 billion.

Flaherty insisted this is a winnable race that doesn’t require much of a sweat.

“I’m actually very confident. We could have done more,” he said. “We could have had a figure that showed a bigger surplus than $800 million in 2015-16.”

“We do not need to slash and burn, we can be sensible over time.”

Economists agree the final goal is still achievable, but they say the odds have gotten longer.

“It doesn’t mean it won’t happen, but we have to see the proof of it happening,” said Mary Webb, who specializes in government fiscal matters for Scotiabank.

Bank of Montreal chief economist Doug Porter concurs, noting that last year analysts were debating whether Ottawa was in position to post a surplus a year earlier — 2014 — something the prime minister bragged about during the 2011 campaign. No such conjecture this time around.

“I feel less confident in saying they can balance the budget in 2015 than a year ago,” said Porter.

The big reason Ottawa finds itself in a tighter fiscal corner in terms of its own imposed deadline is that slower growth than expected has cost the economy about $17 billion, and the treasury about $2.5 billion in tax revenues. As well, the government says the deep discount on Canadian oil exports as compared with world prices has added up to about $8.4 billion in 2011-2012.

For the target to be hit, the government is counting on the economy to rebound soon. It projects that nominal growth — output gains plus inflation — will bounce back to 4.7 per cent in 2014 and stay there in 2015. That’s not normally an outlandish amount in a solid recovery, but the previous two years are estimated at 3.1 and 3.3 per cent rates respectively, so 2014 had better be a good year for the economy.

If it happens, Ottawa will see tax revenues perk up by 5.4 and 6.4 per cent in the critical 2014-15, 2015-16 years.

As well, Flaherty is committing to keep spending of his discretionary budget at basically zero — in real terms even below zero — for the next three years.

The budget shows the government’s spending on operations dropping from $80.5 billion in the just-completed year, to $76.5 billion the period covered by this budget, to $74 billion in 2014-15 and only edging back to $75.2 billion in the target year of 2015-16.

Finance officials say much of the savings stem from the three-year, $5.2-billion cost-cutting measures introduced last year gathering steam with time, but as analysts point out, those figures don’t make any allowance for public service pay increases, inflation or population growth.

The last piece of the puzzle that must fall in place is the government’s hope to realize about $4 billion in savings over the next three years from closing tax loopholes, tracking down tax cheats, and minor efficiencies in the public service, such as reducing travel costs.

Flaherty says for the plan to work, he has to maintain discipline.

TD Bank senior economist Derek Burleton agrees. But to the government’s credit, it has hit most of its spending targets in the first few years of the austerity program Flaherty. And he points out that Flaherty has continued to build in a $3-billion risk margin, so he can afford a few minor slips.

“I don’t think they are being overly optimistic,” he said. “The growth rates are what economists are forecasting, and they have built in a prudence factor.”