Oil prices continue to slide Tuesday morning, now below $55 for the first time since May 2009 – representing a decline of nearly 50 per cent since the summer.
Though Finance Minister Joe Oliver says Ottawa has built plenty of runway in oil’s slide into its forecasts for next year, when government coffers are expected to return to a surplus position, with no bottom to oil’s slide in sight, is it time to ask whether those projections are out the window?
Moreover, those financial assumptions are what underpin a multibillion-dollar plan to cut taxes and increase monthly child benefits for millions of Canadians. Are those tax cuts in jeopardy as oil slumps to new lows?
“It doesn’t look like that, as of right now,” Nick Exarhos, an economist at CIBC said.
“The tax cuts are going to go ahead. The only question is, Ottawa had a $1.9 billion surplus penciled in for 2015, and whether they’ll still be able to hit that target,” Robert Kavcic, a senior economist at Bank of Montreal said.
MORE: Lower oil prices hurt government revenues, Oliver says
Conservative estimate
Minister Oliver announced on Nov. 12 Ottawa expects a surplus of $1.9 billion next year. That’s a conservative estimate that takes into account a possibly severe slump in oil prices, which would affect how much revenue the federal government collects on everything from business to gas taxes.
Ottawa has given itself an ample $3-billion “contingency” cushion in its revenue estimates, though. That means if everything went splendidly with oil (and other commodities) and oil continued on at the higher prices found in the early fall, the surplus would be far bigger than $1.9 billion.
Oil’s plunge is now wiping out the cushion, BMO’s Kavcic said. “That $3-billion cushion is probably going to get eaten up, probably in its entirety.”
Will plunging oil prices threaten to eat into the actual surplus target – something that could potentially pressure Ottawa to rethink its tax cuts?
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Price targets
Oil prices have now tumbled nearly 50 per cent since June, falling to just a penny above $54 in New York on Tuesday morning. The fall has accelerated in recent weeks as a global supply glut has grown.
“It hasn’t been able to stabilize for a day, or an hour even. It’s in freefall,” CIBC’s Exarhos said.
Still, both CIBC and BMO see a bottoming out ahead, with oil prices recovering.
CIBC said oil should average around $73/barrel (U.S.) next year. BMO sees it above $60 in the first half of the year. “In that light,” Kavcic said, “the surplus should still be safe.”
Oliver announced in late October a “family tax cut” plan that includes measures to reduce taxes on married couples with children. The plan will allow for income splitting among other measures, while boosting the Universal Child Care benefit $100 a month, to $160.
The plan has been criticized for neglecting single parents and lower-income groups.
WATCH: Finance Minister Joe Oliver talks to Tom Clark about consumer debt, plummeting oil prices and the Canadian economy.
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