Budget officer warns of harder times ahead

Ottawa's budget watchdog warns the federal government's deficit hole will be much harder to climb out of than originally thought, predicting that even after the economy has recovered there will be a persistent annual shortfall of $19-billion.

Kevin Page, the independent Parliamentary Budget Officer, has been warning Canadian taxpayers for months that Ottawa is sinking into a structural deficit – the kind that requires tax hikes or big spending cuts to eliminate.

The Harper government has strenuously denied this. It says Ottawa will recover to within $5.2-billion of a balanced budget by the 2013-14 fiscal year – largely through economic growth that refills federal coffers with tax revenue.

But in a report Monday, Mr. Page's office significantly hiked its projections for a structural deficit, saying Ottawa is headed for a much deeper one than it earlier forecasted. It now projects the federal government will be mired in an $18.9-billion structural deficit by the 2013-14 fiscal year.

A structural deficit – of the kind that plagued Ottawa in the 1980s and early 1990s – is one that persists over the long term even when the economy is healthy and growing. Mr. Page's office predicts Canada's economy will return to its full potential by the end of 2013, a development that will nevertheless fail to yield enough tax revenue to balance the books.

If Mr. Page is correct, that means the federal government faces an even bigger dilemma in the years ahead, when it will be forced to consider what type of tax hikes or spending cuts to make to close this gap.

The Tories, who railed against deficits when on the opposition benches, have gone to great lengths to play down Canada's budget shortfalls, noting they are relatively small compared to the fiscal headaches facing the United States and other countries.

But Mr. Page says the persistent deficits do matter. He says Canada's aging population – which will see the proportion of workers supporting retirees shrink significantly – means that the fiscal pressure on Ottawa in the years ahead will be measurably heavier than that facing other countries.

He also notes that his forecasts would be worse if not for the government's strict plans to rein in spending growth to less than 4 per cent on average. If Ottawa fails to keep spending increases at this rate, which would be far below historical levels, then future budget deficits will be even bigger.

Responding to Mr. Page's report Monday, the Harper government restated its contention that Ottawa is not in structural deficit.

“We strongly believe permanent structural deficits must be avoided," Finance Minister Jim Flaherty said in a statement. “If necessary, we will restrain the growth of future … spending to eventually eliminate deficits altogether."

Accepting the idea that Ottawa is in a structural deficit would force the Tories to confront the issue of whether their government should raise taxes to balance the books, but the Conservatives have sworn to avoid hiking taxes.

The Conservative plan for shrinking future deficits however includes over-collecting employment insurance premiums by $12.9-billion within a three-year period starting in 2012-2013. The Tories defend the measure as necessary to recoup a deficit in the EI program after rates were frozen at the beginning of the recession.

Mr. Page appears before MPs and senators Tuesday to discuss his updated forecasts.