Money

Plunging oil prices threaten federal surplus, 'bad for Canada'

By David Akin, Postmedia Network

A Husky gas station at Wayne Gretzky Drive and 118 Avenue in Edmonton advertises a regular gas price of 70.4 cents on Monday, Jan. 12, 2015. (Ian Kucerak/Edmonton Sun/ QMI Agency)

A Husky gas station at Wayne Gretzky Drive and 118 Avenue in Edmonton advertises a regular gas price of 70.4 cents on Monday, Jan. 12, 2015. (Ian Kucerak/Edmonton Sun/ QMI Agency)

OTTAWA — Plunging oil prices will wipe out the anticipated federal government surplus this year, TD Economics forecasts, a development that is sure to ripple through the 2015 general election campaign.

That warning, from TD Bank senior economist Randall Bartlett, came the same day as the Conference Board of Canada warned the province of Alberta could be plunged into recession while a top Bank of Canada official told an American audience that the sharp plunge in oil prices was bad news for Canada.

Bartlett says his conclusion is "unambiguous," and that, unless the governing Conservatives — or a new government after this fall's general election -- cut spending or raise taxes, Canada will be back in the red and adding to the country's debt if the trend continues.

Finance Minister Joe Oliver, though, vowed that his 2015 budget would put Canada back in the black and wipe out the deficit for the first time since 2008.

"We will balance the budget in 2015," Oliver said in statement e-mailed to QMI Agency. "While threats to the global economy loom — including falling oil prices -- our Conservative government's plan for the economy is working. We will continue our unrelenting focus on jobs, growth and long-term prosperity."

The chief economist at the Conference Board of Canada, Glen Hodgson, told reporters in Calgary that Alberta is likely headed for a recession.

In Madison, Wis., Tuesday afternoon, Bank of Canada deputy governor Timothy Lane said that, despite the benefits to consumers from the steep decline in oil prices, "lower oil prices are likely, on the whole, to be bad for Canada."

Oliver's most recent update to the federal budget, published in November, forecast increasingly larger surpluses beginning with this spring's budget but one of the assumptions for that forecast was that the benchmark price of a barrel of oil would average US$81 a barrel.

Oil, so far this month, is trading at an average of below US$50 a barrel and some experts say it could go down to US$40 a barrel.

TD Bank's Bartlett crunched his numbers assuming oil would trade at an average of $67.50 a barrel this year and reach US$80.25 next year.

Using those numbers, Bartlett said the government could avoid going into deficit by pretty much using up its $3-billion-a-year contingency fund but that would still leave a razor-thin margin for error. Oil trading much below Bartlett's numbers would result in deficit even the contingency couldn't save.

That would not only undermine Conservative claims to be competent stewards of the federal purse but it would put a fiscal straightjacket on all federal parties as they campaign for votes this year.

"With not much cash left in the kitty, further tax reductions or additional spending will likely be difficult to come by," Bartlett wrote.

Bartlett said there is no fiscal room for the Conservatives' planned adult fitness tax credit or their expected plan to double the contribution limit for the popular tax-free savings account.

 

 

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