Budget office to investigate Flaherty's $7.1B surprise

The surprising revelation last week that Ottawa is almost $7 billion ahead of schedule for eliminating the deficit is attracting the scrutiny of the budget watchdog.

The No. 2 man in the Parliamentary Budget Office says officials have asked the Finance Department for clarification.

"We'll look at it because it will affect our own numbers, and try and figure out what the source of it is," says Mostafa Askari.

"There's a part we still don't understand ... as to why departments spent less than what they were expected to ... and why they (Finance) didn't see it in March," when the budget was tabled.

In a report last week, the government pegged the deficit for the 2012-13 fiscal year at $18.9 billion, rather than the $25.9 billion estimated in the March budget.

The lion's share of the difference — about $4.9 billion — came from lower program spending, including on the public service.

Askari said one pressing question is whether the savings were largely a one-time occurrence or will flow through to future years.

If the latter, analysts say, Ottawa may be able to balance the budget next year, one year earlier than the 2015 target, a boon for the Harper Conservatives heading into an election year.

Election promises

The Conservatives have promised to introduce income splitting for tax purposes once the budget is balanced, a measure likely to boost the party's chances in the scheduled 2015 election.

"But at what cost to Canadians?" says NDP finance critic Peggy Nash.

"This is exactly why the PBO was created and it goes to the heart of accountability for the government. What are the programs and services that have been affected? They won't say."

Nash says she believes Prime Minister Stephen Harper has issued orders to get the budget balanced as quickly as possible to load his campaign platform with goodies, noting that in this month's throne speech, the government pledged more restraint.

Liberal critic Scott Brison says the government's continuing job cuts are a "fatwa" on the public service — politically driven, and not about helping the economy.

When Flaherty was asked why departments hadn't spent their approved limits, he joked: "I think I'm scaring them all."

Underestimating surpluses?

Some critics speculate Flaherty may have been borrowing the tactics of a famous predecessor, Liberal Paul Martin, who set a low bar to look all the better when good numbers arrived.

In Martin's case, the sizes of surpluses were underestimated, a practice Harper and Flaherty have criticized and pledged to end.

But former PBO Kevin Page, who has quarrelled with Flaherty in the past, said he doesn't believe the minister is deliberately under-promising on the fiscal numbers.

Page said during the Martin restraint years in the 1990s, officials cut capital expenditures, such as maintenance and upgrades of equipment, but that proved a false economy in the long run. The move only delayed spending to later years and often increased costs.

"I'd worry about the prime minister and finance minister saying there's too much money in the system, just put the squeeze to it, we don't care how, because we're not going to the election in 2015 with some kind of deficit," he said.

That is becoming increasingly unlikely given the new deficit level, says Scotiabank senior economist Mary Webb, who specializes in federal and provincial finances.

She says the current, lower starting point of $18.9 billion means Flaherty can do much better than the $18.7-billion level he was supposed to get to this fiscal year, which runs to March, making the final leap to balance 2014-2015 possible.

Webb notes that in the March budget, Ottawa forecast the deficit shrinking by $12 billion between the 2013-14 and 2014-15 fiscal years.

"Let's take an optimistic scenario and say the deficit is down to $10 billion after this year, then the question is can they cut $10 billion in one year. Well they were going to, so why not?"

For that to happen, all would need to go well for the government, she said. And Flaherty himself has noted Ottawa is facing additional costs this year as a result of the Lac-Megantic train derailment and Alberta flooding.

But the minister has also included a sizable $3-billion cushion for "risk" in his projections, so Ottawa is that much closer each year than it is reporting.

Webb says the federal government typically "outperforms its deficit target," so although unlikely, she says there may be another Flaherty surprise down the road.