Canada Budget 2012: Lower Deficit, Stronger Economy Puts Flaherty In Good Shape, RBC Says

Canada Budget 2012 Jim Flaherty

First Posted: 03/26/2012 12:57 pm Updated: 03/29/2012 2:57 pm

OTTAWA - Finance Minister Jim Flaherty has won some fiscal flexibility and an elevated level of comfort ahead of Thursday's budget, with some suggesting Ottawa might be able to eliminate the deficit before the next election.

A report from the Royal Bank using published government data suggests on present trends the federal deficit this year could come in as low as $20 billion, $11 billion below what the government calculated in November.

The question is whether Flaherty will use the unexpected bounty to curtail some of the more extreme calls for austerity coming from elements of his party and cabinet.

Last week, the minister stressed that government cuts — expected to range between $4 billion and $8 billion above previously announced measures — will be "modest," but did not define the term.

RBC's analysis Monday shows the better fiscal track reduces the need for overly aggressive action and that Ottawa would be able to eliminate the deficit one year, perhaps even two years, prior to its 2016-17 target, while still keeping cuts at the low end of the range.

"The $4-billion mark is now likely given that we are tracking well ahead of plan," said Craig Wright, RBC's chief economist.

"Although this will allay some of the earlier fears of extreme austerity, holding spending growth to a slower path will still imply some components of government could still potentially see out-right declines," he added.

Some of the savings could be "re-allocated" to high priority new initiatives, such as improving Canada's productivity record.

Signals sent by Flaherty, the prime minister and other ministers point to the upcoming budget being a transformational document, with an eye to the aging baby boomer generation just entering retirement years, rather than something focused on the next year.

There will almost certainly be no new major tax reductions, Ottawa having already fulfilled its goal of taking the corporate rate to 15 per cent.

The budget is expected to usher in long-term changes to Old Age Security, including raising age of entitlement to 67 from 65, a new approach to funding research and development to improve productivity, relaxing the environmental review processes to speed up resource development and trimming the size of government by about 30,000 workers.

In a speech Monday, Natural Resources Minister Joe Oliver confirmed that "streamlining of the approval process for major economic projects across the country will be a key focus" of the budget.

On the fiscal issue, Ottawa has already tackled a major budget headache by capping future health-care transfers to the growth in the economy, meaning its commitment in they key service will climb roughly in tandem with revenues.

Wright estimates the anticipated change to OAS has the potential to save Ottawa $8 billion in 2020 — the first year of likely implementation — rising to $20 billion annually by 2040.

And Flaherty is already well ahead of the game in terms of his quest to return to balance around the next time the Conservatives will have to face the electorate in October of 2015.

That would not only buttress the Harper Conservatives' boast of being good economic stewards, but allow them to fulfil to high-profile election pledges made last spring. During the campaign, he promised the government would bring in limited income splitting and double the limit on tax free savings accounts to $10,000 once the deficit is eliminated.

The RBC analysis shows the government's deficit could be eliminated in 2015-16, or even for the 2014-15 fiscal year.

The bank notes that the first nine months of the current fiscal year shows the deficit will come it at about $20 billion — although late-year adjustments could push that number to about $25 billion — well south of the $31 billion Ottawa had calculated in November.

With three-quarters of the year's numbers in, government revenues have been coming in above expectations, while expenses have been well below.

"If nothing changes in the final three months, then you could get in around that $20-billion mark, but there are still economic uncertainties out there," explained Wright for favouring the conservative estimate.

When the minister met economists earlier this month, they advised him that the risks to the global recovery had diminished, mostly because Europe had begun dealing with its debt crisis and U.S. growth had resumed.

Since then, they have told Flaherty to plan for the economy growing by 2.1 per cent this year and 2.4 per cent next year.

While risks remain, Wright said they have diminished. It's almost certain Flaherty won't need the $3.0 billion he put on reserve during this year, which means it'll come off the deficit bottom line. With the risk of a reversal of fortune lessening, the $4.5 billion reserve for the 2012-13 fiscal period also appears to be icing on Flaherty's fiscal cake.

The importance of the past year's better than planned for performance is that the government's books begin subsequent years closer to the balance, sort of like starting a 100-metre race from the 10-metre point.

"It's still very unlikely they could beat their balanced budget target by two years, but it is within the realm of possibility if all lot of things go well," agreed economist Douglas Porter of the Bank of Montreal.

Porter said the deficit is becoming less of a concern for the Ottawa and will likely use Thursday's budget to set out a path for the future. He notes the critical debt-to-GDP ratio, already the best in the Group of Seven big economies, is on a downward trajectory.

"This budget will be more about setting priorities over the medium and long term," he said. "Frankly, Canada's fiscal situation at the federal level isn't much of an issue for the financial markets."

Note to readers: This is a corrected story. An earlier version misstated the estimated savings from anticipated changes to Old Age Security.

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  • Big Canada Pension Plan Changes Coming In 2012

    Ottawa is bringing in a raft of new or tweaked policies to reflect that retirement these days is more of a gradual transition for many people rather than a single event. Many of these changes either begin in 2012 or are entering the next phase-in period, and they'll have a direct impact on the retirement plans of Canadians. In some cases, the changes are big enough that people nearing retirement may want to have a chat with a financial adviser before deciding exactly when to apply for a CPP retirement pension. (Justin Sullivan/Getty Images) <em>With files from CBC</em>

  • 1. Early CPP, Lower Benefits

    The first change involves payment rates. People can choose to take a CPP retirement pension as early as age 60. But there's a catch: A 0.5 per cent reduction in the pension payout for each month before age 65 that someone begins receiving it. That translates into a retirement benefit that's 30 per cent less at age 60 that it would be if you waited until 65. Starting in 2012, Ottawa is beginning to phase in a bigger reduction to get that early access. For 2012, the penalty rises to 0.52 per cent per month -- or a 31.2 per cent reduction for someone who starts receiving their retirement pension at age 60. The early-bird reduction will continue to rise until 2016, when it hits 0.6 per cent per month, or a maximum 36 per cent reduction for those who start receiving CPP payments at age 60 rather than waiting until they reach 65. (Getty)

  • 2. Later CPP, Bigger Benefits

    Similarly, those who wait until after the age of 65 to start collection CPP will get a bigger increase in their retirement benefit. Before 2011, the rules stated that the CPP retirement benefit was boosted by 0.5 per cent for each month after age 65 that an individual put off receiving it. So someone who waited until age 70 would enjoy a 30 per cent boost in their payments. But starting in 2011, the government began to phase in a gradual increase to that delay bonus. For 2012, the increase for each month after 65 that a person delays applying for CPP goes to 0.64 per cent -- or a maximum increase of 38.4 per cent for those who start receiving a pension at age 70. By 2013, the maximum bonus moves to 42 per cent. These changes won't affect people who are already receiving CPP benefits. They are being made, according to Service Canada, to restore these adjustments to "actuarially fair levels," so there are "no unfair advantages or disadvantages to early or late take-up of CPP retirement benefits." (Getty)

  • 3. Drop-Out Years Increase

    Canadians currently don't need to contribute to the CPP every year from age 18 to age 65 to get a full CPP retirement pension. When someone's average earnings over their contributory period are calculated, 15 per cent of their lowest earning years are automatically ignored when the calculation is made. For someone who takes their CPP retirement pension at age 65, that means seven years of low or zero earnings are dropped from the equation. But starting in 2012, that "general drop-out provision," as it's called, goes up to 16 per cent. For someone eligible for CPP benefits in 2012, that will allow up to 7.5 years of the lowest earnings to be excluded from the calculations -- boosting the retirement benefit paid. In 2014, the percentage will rise again to 17 per cent, which will allow up to eight years of low earnings to be dropped. These changes can really benefit people who entered the workforce late, who were unemployed for a long time, or took time off to go back to school. One point to note is that there are separate drop-out provisions specifically for time spent out of the workforce because of disability or to have children. (Alamy)

  • 4. 'Work Cessation Test' Dropped

    CPP rules used to require that someone stop or drastically reduce the amount they earned during the two consecutive months before they began to receive a CPP retirement pension. This was, for many Canadians, an annoying and costly requirement -- especially since so many people now ease into retirement instead of stopping work completely. Now, that rule is history. Beginning in 2012, the "work cessation test" has been eliminated. (<a href="http://www.flickr.com/photos/misteraitch/" target="_hplink">Flickr: misteraitch</a>)

  • 5. Post-Retirement Benefits

    There's another rule change that's important for semi-retirees to be aware of. Before 2012, if someone started receiving a CPP retirement pension early -- say, at age 62 -- they didn't have to make any CPP contributions if they decided to collect payments but also keep working after age 62. Starting this year, if you are under age 65 and continue to work while also drawing a retirement pension, you and your employer must make CPP contributions. The good news for employees is that these extra contributions will be credited to what's called a Post-Retirement Benefit (PRB), which will result in a higher CPP retirement pension in the year after you make contributions to your PRB. This measure is a nod to the reality that many "retired" Canadians are still working. Canadians who continue working after age 65 and are receiving a retirement benefit will have the choice of whether or not they want to make CPP contributions. If they choose to make them, their employer must kick in their share too. Those additional contributions will go towards higher benefits beginning the year after the PRB contributions. (<a href="http://www.flickr.com/photos/elwillo/" target="_hplink">Flickr: Keith Williamson</a>)

  • 6. Premiums And Benefits Rise

    CPP benefits are always adjusted to reflect the rising cost of living. For 2012, the increase in benefits is 2.8 per cent. That will bring the maximum monthly CPP retirement pension to $986.67. Contribution rates are unchanged. But since the yearly earnings maximum that the rate applies to is going up, the maximum annual contribution will rise by about $89 in 2012 to $2,306.70 for both employees and employers. (<a href="http://www.flickr.com/photos/redvers/" target="_hplink">Flickr:R/DV/RS</a>)

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