OTTAWA – A new independent analysis of federal finances says the Parliamentary budget watchdog is too pessimistic and the finance minister is too optimistic about the prospects of avoiding a structural, or permanent, deficit.
Independent economist Dale Orr said in a report Monday that Ottawa can balance the budget without raising taxes, taking issue with a recent assessment by Parliamentary budget officer Kevin Page, who says the government has a structural deficit.
But Orr also adds that Finance Minister Jim Flaherty’s numbers also don’t quite add up.
Orr estimated that Ottawa could balance the budget in fiscal 2016-17 under the scenario outlined by Flaherty but adds that it will be a lot harder to limit spending growth to three per cent a year than Ottawa plans to do and may even be unrealistic.
Even under that optimistic outlook, he estimates Ottawa will add almost $180 billion to the national debt over the next several years.
But a small increase in spending growth, to say four per cent a year, would delay getting to balance until 2020-21 and add about $220 billion to the debt.
At five per cent spending growth, which is still less than what actually happened under the Conservatives before the recession hit, Ottawa never gets to a balanced budget, said the report, prepared by his company, Dale Orr Economic Insight.
A structural deficit is one that results from a fundamental imbalance between government revenues and spending, as opposed to red ink based on one-off or short-term factors.
In the first eight months of the current fiscal year, Ottawa’s deficit hit $36 billion as spending soared to fight the recession and revenues fell because of higher social and economic spending and a sharp cut in corporate tax revenues.
A 37 per cent decline in business taxes collected was a key driver of the deficit increase as more and more companies suffered losses and did not pay taxes or saw their earnings and revenues squeezed by the recession and slump in exports to the United States.
However, another study paper Monday, from CIBC World Markets Inc., offered some hope on the corporate earnings front.
The investment bank concluded that when the final earnings reports are in for the 2009 fourth quarter, operating profits of companies listed on the TSX should be up 43 per cent, the first increase since the third quarter of 2008.
Insurance and mining will lead the gains, CIBC World Markets said.
“As in the U.S., the forthcoming (TSX earnings) reports will mark the end of the earnings recession, after four down quarters,” said Peter Buchanan, senior economist in CIBC’s latest TSX Earnings Watch.
“The gain for the TSX looks like a tough wall to climb, but will in fact benefit hugely from an easy comparison with a year earlier, when both the Canadian and global economies sank into recession, dragging commodity prices and profits down. In sequential terms, TSX earnings will have to rise by only five to six per cent from the previous quarter to meet expectations.”
The report found that profits in seven of 10 major TSX market sectors are expected to improve this year. After insurance and base metals, health care, info tech and utilities stocks are expected to show the largest increases.