Forget about balancing the books, PBO forecasts deficit

The message from the government isn't changing, but Canada's economic situation certainly is. 

A shrinking GDP for the first quarter of the year prompted another rate cut by the Bank of Canada this month, while the loonie dropped to its lowest point this week in more than a decade.

A changing fiscal situation calls for a changing outlook, and the parliamentary budget officer — Canada's budget watchdog — has responded with a fresh forecast, predicting a $1 billion deficit for 2015.

"The economy has weakened since the (April) budget," assistant parliamentary budget officer Mostafa Askari tells The House.

"There are indications that the second quarter will also be negative," he added. "As a result the base for government tax revenue is lower, so one would expect that the overall level of revenues would be lower and that would affect the bottom line."

At the same time, the Department of Finance released their fiscal monitor for April and May. The surprise news?

The federal government posted a surplus of $3.9 billion for the two months, and is on track to balance the budget for the 2015 fiscal year as a whole.

So how do the numbers match up? And is a deficit really as toxic fiscally as it seems to be politically? 

From an economist's perspective, Askari doesn't think so.

"One has to look at the long-term fiscal sustainability rather than year-to-year changes in the fiscal balance," he said. "What matters to the economy is whether in the long run you can have a stable debt or a declining debt-to-GDP ratio."

Based on the PBO's calculations, Canada is "on the right track" to achieving that goal, Askari said.

"We have shown that...the debt-to-GDP ratio is going to decline significantly over the next 25 to 30 years and it will eventually be eliminated if you maintain the current fiscal structure," he said.

"And that can happen with having deficits a number of years during that period," the assistant PBO added.