Structural deficits coming: Parliamentary Budget Office

Ottawa will face structural budget deficits well into the future even after the Canadian economy returns to normal levels of expansion, suggests a report from the Parliamentary Budget Office.

A structural deficit describes a portion of a country's budget deficit that exists even when the economy is running at full capacity during a period of expansion.

Ottawa went $56 billion into the red in the 2008-09 fiscal year by opening the taps to unprecedented stimulus spending. Much of that shortfall will be reduced as stimulus is removed and the economy theoretically starts to expand again, the Department of Finance says.

That plan hinges on a return to economic expansion. But the PBO report released Wednesday has a more modest growth forecast.

"The downward trend in potential GDP growth observed since 2000 will continue over the projection horizon, averaging 1.9 per cent over the 2009 to 2014 period," the report said.

In a briefing to reporters, parliamentary budget officer Kevin Page said the government's structural deficit will grow rather than shrink even during the years the economy is growing.

"We've been thrown off track…. What we're saying to parliamentarians is, 'You've got tough choices ahead — you've got a weak economy [now] ... and you have to deal with that'," Page said.

"We're also saying, unfortunately, 'You've got to start dealing with a structural fiscal problem that is going to get bigger and bigger and bigger.' "

The PBO is an independent body, mandated to provide independent analysis on the state of the country's finances, government estimates and trends in the national economy.

A structural deficit happens when the shortfall between income and spending becomes systemic and normally requires deliberate action — typically either tax increases or spending cuts — to rectify.

Estimates 'appear to have diverged'

The Department of Finance and the PBO's estimates of Ottawa's structural balance track each other closely over history. Despite differences in accounting practices, they have been 96 per cent correlated since 1976, the PBO notes.

"However, since 2006-07 when the structural balance was estimated at $8.8 billion by both Finance Canada and PBO, the structural balance estimates appear to have diverged," the report says. "Indeed, in 2008-09, Finance Canada estimates a structural surplus of $13.8 billion while PBO estimates a $3.2-billion structural deficit."

"This divergence largely reflects differing views on the economy’s potential GDP," the report says.

The PBO is forecasting structural deficits ranging between $12.5 billion and $18.9 billion for each of the next five fiscal years. Should the PBO's forecast play out, Canada's structural deficit would represent roughly one per cent of potential GDP by then — still low by many global standards.

But by 2014, Finance Department forecasts expect the Canadian economy to once again be approaching a balanced budget.

Tax cuts

The Conservative government has aggressively cut personal, consumer and corporate tax rates over the last three years. A one per cent reduction in the goods and services tax is estimated to reduce Ottawa's revenues by $5.4 billion. Ottawa has twice slashed the GST by that amount since Stephen Harper became prime minister in 2006.

The government has thus far insisted that a return to balanced budgets can be achieved without raising taxes or significantly cutting program spending, instead relying on basic economic expansion.

Earlier this week, Harper said he was not overly concerned about the deficit, saying Canada's finances would not be problematic as long as the government takes in more than it spends once stimulus is removed in the spring of 2011.

But Page's analysis suggests that the numbers do not, at this point, lead to a balanced budget unless the economy starts performing well above normal historical capacity.

Canada's population is aging, said Page, and more and more Canadians are moving from producers who pay taxes to retirees who drain government services from medicare to old age security.