Flaherty says deficit years will end with a $3.7-billion surplus in 2015

OTTAWA - The Harper government will end seven years of deficits in 2015 with a $3.7-billion surplus, just in time for the next election — a campaign in which Finance Minister Jim Flaherty now says he intends to run.

The new projection — nearly $3 billion better than the March budget forecast — was part of Tuesday's fall economic update, which Flaherty upstaged a little by declaring he would be a candidate for re-election in two years' time.

Flaherty, who suffers from a serious skin condition, has said he would stay until the budget was balanced. Asked directly whether he would run in 2015 — when by his accounting he will achieve that goal — he responded unequivocally: "Yes."

Besides new estimates of the government's fiscal position, Flaherty's update — a mid-year report card on the economy and Ottawa's books — contained a few surprises, including plans for future asset sales and a costing of savings tied to the recently announced departmental spending freeze.

"We're on track to get back to balance in 2015, without raising taxes or cutting investments in health care and social service transfers, as promised," Flaherty declared in a news release.

The update, officially released at a moderated question-and-answer event in Edmonton, takes a cautious approach to the economic reality facing Canada and how it will affect the government's books.

In fact, Flaherty has included a $3-billion risk buffer in his baseline calculations, meaning unless the global or Canadian economies perform much worse going forward, the government could find itself sitting on a $6.7-billion surplus in an election year.

In the 2011 campaign, Prime Minister Stephen Harper said a Conservative government would offer Canadian couples with children under 18 the option of splitting their income to reduce taxes — once the budget was balanced.

By some calculations, that would deprive Ottawa of about $2.7 billion in revenues.

Harper also promised several other boutique tax cuts, as well as a doubling of the $5,000 annual limit on contributions to tax-free savings accounts, all of them contingent on balanced books — pledges that would shave a total of about $600 million more from tax revenues.

Flaherty suggested there would be heated debates at cabinet as to what to do with the bounty, and that he would warn against overly aggressive spending.

"Some things can be phased in over time; not everything needs to be done at once," he said.

"We certainly don't want to lose the fiscal advantage we've created for Canada. The Canadian brand is very strong around the world."

Opposition critics suggested the government numbers cannot be trusted. The Liberals said much of the improved fiscal picture comes from employment insurance savings, and that the government should have cut premiums sooner. By 2015-16, the fund is projected to have a $5.6-billion surplus, accounting for more than the total surplus on the government books.

In the current fiscal year, Flaherty said he expects a $17.9-billion deficit — $1 billion below the previous year's shortfall — as a result of better-than-expected savings from cost-cutting and lower interest charges that more than make up for lower revenues from slow economic growth.

Last month, Ottawa announced it was $7 billion ahead of pace in its deficit elimination track. In this year's budget, Flaherty said, the government will need to pony up about $2.8 billion for disaster relief related to the Alberta floods, and another $60 million already committed for the Lac-Megantic train derailment in Quebec.

The deficit will fall to $5.5 billion in 2014-15 as a revived economy starts producing more tax revenues, he predicted.

Flaherty said the government also expects to realize about $1.65 billion in savings from the throne speech pledge to freeze internal departmental budgets, which will occur in the 2014-15 and 2015-16 fiscal years.

Another $2 billion in revenues will come over the next two years from selling the government's remaining stake in General Motors, as well as the Ridley coal terminal in British Columbia and the Dominion Coal Blocks, two Crown lands also in B.C.

At current prices, the sale of GM shares alone could net Ottawa $2.6 billion, but the government document admits the booked amounts are "conservative and do not reflect the full potential gain."

Also conservative is the projected savings from departmental spending restraints. In last year's final tally, Ottawa admitted departments had underspent their limits by $5.2 billion, and "lapses" in spending may carry forward to future years.

The major new restraint is from the two-year departmental spending freeze, which builds on a previous stand-still measure and the chopping of about 20,000 jobs. Most analysts believe department heads will need to cut more salaries in order to meet the target.

"Under the freeze, departments and agencies will be required to absorb any collectively bargained wage increases for those two years," the update said. "This will incent departments to become more efficient."

On economic prospects, Flaherty was given new growth estimates by private sector economists two weeks ago and they show the economy advancing by 1.7 per cent this year, 2.4 per cent next year and 2.6 per cent in 2015.

Those represent moderate growth rates, but from Ottawa's point of view the more important numbers are those for nominal GDP, which is directly tied to tax revenues. Those numbers have taken a hit because of lower-than-expected inflation. Next year's nominal growth is now projected at 4.2 per cent, down half a point from March's estimate, which Ottawa says will slow revenues.

Also impacting the government's bottom line is the continued discount markets put on western crude, which Flaherty attributes to lack of pipeline capacity. Ottawa estimates the lower price for Canadian oil has cost exporters about $7.6 billion on average since 2010.

Still, the government says its books are overall in better shape than it thought in March.

"Total economic and fiscal developments since budget 2013 have largely resulted in an improvement to the fiscal outlook, as weaker projected revenues are generally more than offset by lower projected expenses and public debt charges," the update concludes.

— With files from Tim Cook in Edmonton