Ottawa boosts economic forecast

Despite a chorus of concern that a federal budget balance can’t be achieved without tax hikes, private-sector economists said Tuesday that Ottawa’s fiscal plan is workable as long as policy-makers live up to their pledge to restrain spending growth.

After a meeting with Finance Minister Jim Flaherty in Ottawa as part of pre-budget consultations, analysts said Ottawa might have to wait an extra year or two before the country returns to surplus, as uncertainty remains over the pace of growth once stimulus measures from around the world are removed.

But a budget balance is doable, a number of them added, and might not require the "draconian" measures, such as tax hikes, that some have feared.

"I would put a very low priority on tax increases," said Douglas Porter, deputy chief economist at BMO Capital Markets, after the meeting ended. "I think that should be almost a desperation move."

The outlook from economists led Flaherty to bump Ottawa’s forecast for economic growth this year to 2.6 per cent from the previous expectation of 2.3 per cent. That’s still below the Bank of Canada’s projection for expansion of 2.9 per cent this year.

This comes on the heels of GDP data released Friday that indicated growth last November surpassed market expectations, putting Canada on pace to record expansion of roughly 4 per cent for the final three months of 2009.

Flaherty has pledged to return to budget balance without raising taxes, or cutting transfers to the provinces or individuals.

He plans to target roughly $100 billion in program spending, which has increased at an average annual pace of eight per cent since the Conservatives formed government in early 2006.

Stefane Marion, chief economist at National Bank Financial, said Canadian efforts to return to surplus would be less daunting than those faced by other industrialized countries. Canada’s deficit this fiscal year is expected to be roughly $56 billion, or 3.8 per cent of GDP, while the United States is looking at a $1.5-trillion U.S. shortfall for 2010-2011, or 10.6 per cent of GDP.

Still, he added, Ottawa should demonstrate caution before embarking on spending cuts, and might want to look at a five to eight-year time frame.

"There is tremendous uncertainty going two to three years down the road as there are some structural changes that will happen in the global economy in the aftermath of the global credit crisis," he said. "In the Canadian context, we have to be careful not to be overly aggressive."