OTTAWA - The federal government will easily manage to avoid slipping into a deficit position despite the slumping economy and will almost certainly record higher surpluses than forecast, says a new analysis by the Conference Board of Canada.
The private sector think-tank says higher-than-projected inflation, along with other factors, have boosted government revenues and almost completely countered the impact of slower growth and tax cuts that went into effect in January.
Finance Minister Jim Flaherty had forecast a $2.3-billion surplus this fiscal year and a slim $1.3 billion surplus in 2009-2010, but the Conference Board believes Ottawa will be able to better both targets.
"Federal revenues should have been down nearly $20 billion in the first quarter, given the measures set out in last fall's economic statement," said chief economist Glen Hodgson.
"Instead, only a ($1.1 billion) reduction is showing up in the national accounts" for the first three months of the fiscal year.
The report does not predict the size of the surplus this year, but Hodgson said in an interview that $5 billion would not be a surprise.
Several other economists, including Dale Orr of Global Insight Canada, have also recently dismissed fears that Canada's slumping economy -- which many now believe could grow at half the rate of the budget's 1.7 per cent working assumption -- will result in the first federal budgetary deficit in more than a decade.
The estimates of additional fiscal room for Ottawa do not surprise John Williamson of the Canadian Taxpayers Federation, who has long argued that Ottawa taxes more than it requires.
Williamson said he has been watching with interest a flurry of spending announcements in the run-up to what appears now as an almost certain fall election campaign, "including money for Nova Scotia, Bombardier, money for festivals and ribbon-cutting cutting ceremonies right across this country."
Recently, the federal government has re-confirmed a $350 million research and development commitment to Bombardier Inc. (TSX:BBD.B) and announced a $870 million offshore resource settlement with Nova Scotia.
"This is not a government that is going to fall back into deficit, and for good reason, voters won't support that," Williamson said. "So how do you explain this irresponsible spending? It is because they have the money to do it and that is coming from higher than expected revenues flowing in from taxes."
On Tuesday, the Bank of Canada lowered its projection for second quarter growth, but did not say whether it still expects the economy the meet its average annual target of a one per cent advance.
The Conference Board analysis comes after the Department of Finance reported Friday a $1.2 billion surplus for the April-June quarter, down from $5.6 billion last year. And although revenues fell $1.1 billion due to a lower take from corporate taxes and the GST, personal income tax receipts are more than holding their own.
The numbers do suggest that the days of $10 billion and more surpluses are over, Hodgson said, but they also point to government revenues holding up remarkably well despite an economy that has been basically flat since the beginning of the year.
One factor is inflation, which is pushing up salaries and hence income tax revenues.
"Slower economic growth is a negative, but right now inflation is above two per cent and we're having faster nominal income growth as a consequence, and that gets taxed," explained Hodgson.
As significant, he said, is that finance officials continue to under-count the amount of tax revenues generated through increases in Canadian incomes. The growing wealth concentration among higher income earners -- the so-called income disparity phenomenon -- has meant that governments realize a great portion of revenue from average national income growth.
"Over the medium term, the Conference Board expects that the federal government will be able to continue to generate fiscal surpluses," the report states.
"In turn, this will create scope to pay down debt, reduce taxes, and/or introduce targeted increases in spending."
