Canada charts comfortable course to 2015 budget surplus

Canada's Minister of Finance Jim Flaherty speaks following the delivery of the budget on Parliament Hill in Ottawa February 11, 2014. REUTERS/Blair Gable (Reuters)

By Louise Egan OTTAWA (Reuters) - Canada's Conservative government looks set to comfortably balance its books in 2015 or even sooner, its latest budget showed on Tuesday, with cuts in spending on the public service more than offsetting a series of modest new expenditures. The low-key spending plan leaves Prime Minister Stephen Harper well-positioned to offer tax breaks and other initiatives in the runup to an election scheduled for October next year. "Some people will say this budget is boring," Finance Minister Jim Flaherty told reporters ahead of the budget speech. "Boring is good." The budget shows a deficit of C$2.9 billion ($2.63 billion)in the 2014-15 fiscal year, up from the previous estimate of C$5.5 billion. That balance includes a C$3 billion contingency fund, which in fact reveals an underlying surplus that year. Flaherty acknowledged the budget would be narrowly balanced this coming year without the contingency fund, but said he preferred to have a "nice clean surplus next year". The government estimates a bigger-than-expected C$6.4 billion surplus in 2015-16. In the year ending March 31 of this year, the deficit is pegged at C$16.6 billion. The Conservatives, in power since 2006, plunged into a deep deficit in 2008 as they pumped out stimulus money to deal with the recession after having cut taxes earlier. Previously, the Canadian government had an 11-year string of budget surpluses. The government's reluctance to go for a balanced budget in 2014 was seen as preparing for an election-friendly budget the following year. "This is a budget designed to build a bigger war chest for the next budget," said Avery Shenfeld, chief economist at the Canadian Imperial Bank of Commerce. He added that the government should be in a position to "have more money to give away" in 2015. But the main opposition party, the New Democrats (NDP), said the government should act now to encourage job creation, which has been sluggish in recent months. "There's nothing in this budget that will create jobs and that's the issue because that's one of the first priorities for Canadians," said Thomas Mulcair, leader of the NDP. The Canadian economy in January recouped 29,400 of the 44,000 jobs lost in December. The unemployment rate fell to 7.0 percent from 7.2 percent but the jobless rate among youth was twice that, and the average job gain over the last six months was 15,300. Justin Trudeau, who heads the third-place Liberals, said: "This government has run out of ideas and is demonstrating it once again." The Conservatives have a majority in the House of Commons and can easily pass the budget legislation. Flaherty, who is 64 and battling a rare skin disease, has staked his reputation on eliminating Canada' small deficit, equivalent to about 1 percent of gross domestic product (GDP), and restoring the reputation the country had before the global financial crisis as having the strongest fiscal record in the Group of Seven major economies. Germany is currently the only G7 country running a surplus, but Canada's ratio of debt to GDP is substantially less and it is one of a handful of countries with a triple-A rating from rating agencies. Flaherty's budget assumes economic growth of 2.3 percent this year and 2.5 percent in 2015. It also assumes the Canadian dollar will be worth about 94 U.S. cents this year. The Canadian dollar is already weaker, at about 90 U.S. cents, and is projected to depreciate further in the coming year. That implies growth could beat the government's estimates and ultimately improve the budget balance further. When asked to comment on the currency's impact on the economy, Flaherty acknowledged that it was "good for exporters", adding: "I would expect there's a value to the dollar inherently, around which it will settle and we'll see what that is." MONEY FOR AUTO SECTOR With the U.S. economy looking healthier and likely to boost Canada's fortunes, the budget contained few measures to provide extra stimulus. It outlined plans to help push down consumer prices on wireless roaming, retail goods and banking services, part of a broader pro-consumer agenda aimed at winning middle-class voters also being wooed by the opposition. It ensured an additional C$250 million a year in financial aid for the automotive sector. The government has been under pressure from Fiat Chrysler, which has asked for funding for a minivan plant, and which has said it might have to slash jobs in Canada if it doesn't get help. The budget also provides C$28 million over two years to the National Energy Board to help it review projects such as TransCanada Corp's Energy East pipeline project, within legislated timelines. But the fiscal cost of these initiatives is minimal compared with the cost-cutting steps announced. The budget shows the biggest savings coming from reduced spending on government worker compensation. This comes on top of other cutbacks that have put the Conservatives on a collision course with public sector unions as they prepare to negotiate 27 collective agreements starting in 2014. Among other changes, the government will ensure that the costs of the public service health care plan for retirees are shared equally among the government and employees, whereas currently the government pays for 75 percent of the benefit. Changes to compensation for current and retired government workers will add C$1.5 billion to the government's bottom line in 2014-15 and C$7.4 billion over six years. An increase in the excise duty on tobacco products will bring in an additional C$3.3 billion in the same six-year period, the government estimated. The government will also delay capital spending by the military, shifting C$3.1 billion to future years. The plan contained no new measures on the housing market, after recent data have eased fears of a housing bubble. Despite speculation Flaherty might step down soon to take care of his poor health, which has forced him to cut back on activities and travel, the veteran cabinet minister has vowed to stay on till a surplus is reached. He dodged questions on Tuesday about whether the new budget figures would allow him to bow out. "We have work to do, and I intend to implement the budget," Flaherty replied, when asked if this budget would be his last. ($1=$1.10 Canadian) (Additional reporting by Randall Palmer and Peter Henderson; Editing by Jeffrey Hodgson; and Peter Galloway)