The budget watchdog released a new analysis Tuesday confirming what analysts and economists have been saying for weeks: Finance Minister Joe Oliver will have his work cut out for him if oil prices continue to hover close to their current lows.
That said, though, PBO officials say Oliver still has plenty of options in order to eliminate the deficit in 2015-16.
The office's figures come as questions dog the federal government about whether the oil slump will derail its long-held pledge to guide Canada's books back into the black — and if so, how the government intends to recover.
The government recently took the rare step of delaying the release of its budget until at least April, so it could evaluate the impact of oil prices that have been cut by more than half since last summer.
Cheap oil — US$48 a barrel through 2015 — would cost the government $5.3 billion in 2015-16, erasing its $1.9-billion surplus projection from November and the $3-billion federal contingency reserve and leaving a $400-million deficit, the report said.
Should the average price of oil reach US$51 a barrel this year, federal revenues would fall by just $4.2 billion, using up much of the contingency reserve to deliver a narrow surplus of $700 million.
With low oil prices, "it's not impossible" for the government to post a modest surplus in the 2015-16 budget, said parliamentary budget officer Jean-Denis Frechette. Even a modest deficit wouldn't cause economic problems, he noted.
"It's a decision for the government to take."
The budget watchdog's office says the government has several options if it hopes to generate more revenue or trim its spending in the upcoming budget. They include:
— Selling off shares in General Motors of Canada, which are currently worth up to $5 billion;
— Temporarily delaying capital projects;
— Adjusting the federal government's long-term liabilities, such as making changes to public-service pensions.
Oliver and Prime Minister Stephen Harper have repeatedly insisted the government will produce a balanced budget for 2015-16.
To do so, Oliver has acknowledged the government may have to dip into the $3-billion reserve, which has been set aside for unforeseen circumstances; he has also categorically ruled out spending cuts.
"We will not be cutting expenditures," Oliver told the House of Commons on Monday.
Any unused money left in the reserve would be earmarked for debt reduction.
Harper welcomed the PBO's report Tuesday.
"The parliamentary budget officer himself has said today even looking at his own numbers that the government will be capable of balancing the budget this year," Harper said during question period as the government weathered a sustained barrage of opposition criticism.
Nathan Cullen, the NDP's finance critic, saw the report in a decidedly different light.
"Another day and another report showing the mess that Conservative economic mismanagement put us in," Cullen said.
Cullen also cited recent reports by TD Bank and the Conference Board of Canada which illustrated the extent to which the plunging price of oil is wreaking havoc on the federal treasury.
Last week, an analysis by the Conference Board of Canada predicted low oil prices would shave $4.3 billion from government income in 2015 and smack provinces with nearly $10-billion in lost royalties and tax revenue.
On Monday, TD cut its 2015 forecast for the Canadian economy and warned the Bank of Canada could drop the trendsetting interest rate again in March.
The central bank surprised financial markets last week when it lowered its key rate to 0.75 per cent to help cushion the threat of low oil prices.
Follow @AndyBlatchford on Twitter