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Federal Politics

Sinking Oil Prices Could Push Ottawa into Deficit: Report

Study didn't look at fallout of continued price slide.

Jeremy Nuttall 27 Jan

Jeremy J. Nuttall is The Tyee's Parliament Hill reporter in Ottawa. Find his previous stories here.  

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A report from Canada's Parliamentary Budget Officer says the country's fiscal situation can stabilize in the face of plunging oil prices if the government uses up its $3-billion contingency fund, sells assets or "tweaks" other expenditures.

If it manages those feats, it can get away with little more than a $400-million deficit in the next budget.

But that's only if oil prices stay at $48 per barrel, or if they rise. The budget watchdog did not examine the worst-case scenario of oil prices dropping further.

The Conservatives have promised to deliver a balanced budget later this spring.

The PBO is an independent body with a mandate to examine Canada's public finances. Liberal MP John McKay requested the report on how slumping oil prices could affect the promised federal government surplus, and the effect it could have on financing federal services.

The Conservatives have delayed releasing their budget until April, creating a suspicion that they don't know how to balance the books with reduced oil revenues.

The PBO responded to questions about the fiscal hit oil prices could deliver in an eight-page report using two hypothetical scenarios.

In the first, the PBO said if oil prices stabilize at $48 per barrel, the government would lose $7.6 billion annually over the next five years due to decreased revenues on sales and income tax.

The second scenario puts oil at $51 per barrel this year, representing a loss of $4.2 billion into 2016 with that number going down as oil prices go up before peaking at $81 per barrel in 2019.

But the money to help ease the burden must come from somewhere, and the budget watchdog said Canada's $3-billion contingency reserve will have to be used if the government is to keep the deficit at $400 million.

"The government's budget balance for planning purposes included a $3 billion annual 'set‐aside for contingencies' which if not required would be used to reduce the federal debt," the report said. "Notably, the potential for further declines in oil prices was cited as a candidate for such contingencies."

During Question Period on Tuesday, Finance Minister Joe Oliver insisted the budget would be balanced, pointing to the PBO report as proof it can be done.

Liberal finance critic Scott Brison said if the budget can be balanced, then presenting it now should be easy.

Brison said economists have already predicted that Canada is going back into deficit, and said releasing the budget could "clear up" any confusion.

But he said the real problem is the Conservatives handling of the country's finances.

"You don't build your budgetary framework assuming oil is going to stay at $100 a barrel," Brison said. "The reality is they have spent us right up to the edge assuming oil prices would stay at $100 for good."

'No breathing room'

David Macdonald, senior economist with the Canadian Centre for Policy Alternatives, said as long as oil balances out at $50 per barrel Canada will be able to get away with a small deficit of under $1 billion.

He said that government initiatives like income splitting and the promise to balance the budget have made it a delicate task.

"There's no breathing room here at all; we're right on the wire," Macdonald said. "From an economic perspective, running a deficit at this point would be actually a fairly positive phenomenon."

Due to the political promise to balance the budget, Macdonald said he doesn't expect the government to take on a deficit.

Unifor economist Jim Stanford said layoffs of government workers to tighten the budget has affected the delivery of government services. He added that tax breaks in the form of income splitting add to the government's fiscal strain.

"They counted their chickens before they hatched and started doling out billions in these very politicized tax cuts," Stanford said. "That is not a legacy of prudent stewardship; that is a legacy of fiscal recklessness."

Parliamentary Budget Officer Jean-Denis Frechette said the government has other options to reduce the deficit, including selling government assets, cancelling capital projects, and moves such as changing government benefit packages for employees.

Frechette's office would not comment on the fiscal prudence of such measures.

At a news conference Tuesday morning, Frechette and assistant budget officer Mostafa Askari didn't go into detail about why the report did not examine the possibility of oil dropping even further below $48 per barrel, saying they had to choose hypothetical scenarios.

"We can do an update and do another scenario later on," Frechette said when pressed on the two scenarios chosen.  [Tyee]

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