Private-sector economists will deliver some bad – although not unexpected – news when they meet with federal Finance Minister Jim Flaherty on Tuesday: The government's numbers are too rosy, and some are questioning whether Ottawa will meet its timeline for erasing the deficit.
The government first released its 2011 budget in March, but it chose not to update its assumptions when it re-released the budget in June after the federal election. However, months of economic havoc – including debt troubles in Europe and a credit downgrade in the United States – are adding up to a gloomier economic picture.
Based on long-standing practice, Mr. Flaherty's March numbers were largely based on an average of forecasts by 15 private-sector economists. An update of those numbers is expected to be released on Tuesday after Mr. Flaherty meets with the economists in Ottawa. All signs point to lower growth than forecast in the budget.
The news isn't all bad for Mr. Flaherty, who will use this information to produce a fall economic update. Slower growth means that the government will save money on borrowing costs thanks to lower-than-expected interest rates. Last year's deficit also came in smaller than forecast, which helps Ottawa's bottom line in future years.
The 2011 budget assumes real growth in gross domestic product of 2.9, 2.8 and 2.7 per cent for 2011, 2012 and 2013, respectively. However, the latest average of 23 forecasts compiled by Bloomberg projects growth for this year and the next two at 2.2, 2.1 and 2.3 per cent.
Arlene Kish, principal economist with IHS Global Insight and one of the 15 contributors to the average in the budget, is projecting GDP growth of 1.7 per cent for this year and 1.4 per cent next year.
"Things have become much more pessimistic," she said in an interview, predicting that it could force the government to extend some stimulus programs or push back its plan to erase the deficit by 2013-14. "Those projections are in jeopardy," she said. "I think [the target] might be even extended out a year, possibly two, for the deficit."
Other economists – including Toronto-Dominion Bank's deputy chief economist, Derek Burleton, and the Conference Board of Canada's chief economist, Glen Hodgson – also indicated in interviews that there is some doubt as to whether the government is on track to meet its target.
But Craig Wright, Royal Bank of Canada's chief economist, indicated that, for now, the government's 2011 budget numbers still largely hold up. "I don't think getting back to balance in 2014-15 is at risk," he said. "If we see a downturn in global growth and spill-over into Canada, [the government is] flexible. They won't say, 'Well, we're going to get back to balance no matter what.' ... Because we've learned through the last few months with Greece that if you focus only on deficit and debt, and ignore GDP, the numbers work against you, not for you."
Prime Minister Stephen Harper and Mr. Flaherty have increasingly expressed a willingness to be "flexible" should the economy worsen. While such language is widely being interpreted as a willingness to extend some stimulus measures or push back the deficit-erasing timeline, the government has not outlined what such "flexibility" would look like. Treasury Board President Tony Clement, who is in charge of finding $4-billion a year in savings as part of the deficit fight, has repeatedly stated of late that the target will be achieved.
Several economists who are consulted by the Finance Department said on Monday that the government should wait and see whether new policy measures are needed. "I think most in the room will be on the side that the government should stay the course, given the current picture," TD's Mr. Burleton said.