UPDATE 2-Canada sees bigger surplus in time for 2015 election

Nia Williams
Tuesday, 12 Nov 2013 | 4:29 PM ET

EDMONTON, Nov 12 (Reuters) - Canada's Conservative government expects to easily meet its goal of eliminating its budget deficit by 2015, just ahead of an election, and has increased its estimate of that year's surplus even as it warns of an uncertain global economic outlook.

The finance ministry estimated on Tuesday a surplus of C$3.7 billion ($3.5 billion) in the 2015-16 fiscal year, up from its March 2013 forecast of an C$800 million surplus.

The figures include a C$3 billion cushion for risk, which means the underlying surplus could be that much bigger.

The Conservatives promised in the 2011 election campaign they would introduce personal income tax cuts once the budget is balanced. They are expected to revive that promise in hopes of getting re-elected in October 2015.

The fiscal outlook has brightened because weaker revenues have been more than offset by lower program spending and public debt charges, the finance ministry said in its fall fiscal update.

Canada's federal budget deficits have paled in comparison with those of the United States, even adjusting for the fact that the U.S. economy is nine times as big. Washington posted a $680 billion gap for the fiscal year that ended in September.

Canada had run 11 straight surpluses before tipping into deficit in 2008/09 as the result of Conservative tax cuts and then the global recession. The deficit peaked at C$55.6 billion in 2009/10 because of major stimulus spending.

"Bottom Line: Ottawa has managed to keep its finances on the straight and narrow through a prolonged period of sluggish growth," said Bank of Montreal chief economist Doug Porter. "Exceptionally low borrowing costs and fewer spending pressures than faced by the provinces have helped."

But in Tuesday's update the government also cut its forecast for nominal gross domestic product, the broadest measure of the tax base, for this year and next, and warned of risks to the U.S. and global economies.

It now sees the economy growing 4.2 percent in 2014 before accounting for inflation, down from the 4.7 percent it forecast in March.

"Ongoing global uncertainty and recent examples from around the world of the consequences of ongoing and growing deficits make it even more important for Canada to remain focused on balanced budgets," Finance Minister Jim Flaherty said in prepared remarks.

Ottawa expects its bottom line to be helped by the sale of its remaining shares in General Motors Corp, which could bring in billions of dollars in the next two fiscal years. Ottawa booked a gain of C$700 million this fiscal year from the sale of a portion of its shares in the automaker, which it bailed out during the recession.

The fiscal outlook uses conservative estimates and books a combined C$2 billion gain over two years from the expected sale of GM shares as well as from the sale of a bulk coal terminal and some coal blocks in British Columbia.

At today's price, the GM shares alone would produce a gain of C$2.6 billion, according to a finance ministry official.

Ottawa projects a smaller-than-expected deficit of C$17.9 billion in the current fiscal year, or 1.0 percent of gross domestic product, down from its March budget estimate of a C$18.7 billion shortfall. The deficit estimate has shrunk even though the government booked C$2.8 billion in disaster relief for June's Alberta flooding.

For 2014/15, it forecasts a deficit of C$5.5 billion, compared with C$6.6 billion previously.

Program expenses are seen declining to 12.4 percent of GDP by 2018/19 from the current 13.6 percent, while revenues are projected to rise slightly in the same period to 14.4 percent of GDP from 14.2 percent.

As the economy begins growing faster than debt is added on, the ratio of debt to GDP is slated to shrink, to 25 percent in 2021 from 33.1 percent now.

The government said it would implement an operating freeze for all departments except defense, which has a built-in spending escalator. The freeze is to yield C$550 million in savings next year and C$1.1 billion in 2015/16.

Private-sector economists who met Flaherty in October told him that while the risk of an extreme negative economic outcome had lessened since earlier in the recovery, "overall risks remain tilted to the downside," the finance ministry said.

High household debt remains the main domestic risk to the outlook, it said. "While the pace of household credit growth has continued to slow, the recent pickup in housing market activity, if it reflects stronger underlying momentum, could translate into further debt accumulation," the ministry said.

Flaherty has taken steps to cool down Canada's housing market, and said on Tuesday he would intervene again if needed.