09/27/2011 09:45 EDT | Updated 11/27/2011 05:12 EST

PBO says government spending generally consistent with budget plan

OTTAWA - The chances that Finance Minister Jim Flaherty will miss his target to balance the budget by 2014-15 have increased because of a slowing economy, the parliamentary budget watchdog said Tuesday.

Kevin Page said projections done by his office earlier this year gave Flaherty a one-in-five chance of balancing the books by that deadline.

But since then, the outlook for the global and Canadian economies has worsened.

"It will be less likely now," Page said of the chances Flaherty will have a balanced budget in three years.

With recession fears growing in Europe and the U.S. economy still in the doldrums, Canada's growth rate has been scaled back because the export sector is under pressure and demand is falling for many of the resources the country produces.

As well, the recent volatility on stock markets has eroded consumer confidence and made ordinary Canadians more reluctant to spend.

Slower growth generally means lower corporate and personal tax revenues for governments, squeezing their overall revenues and putting upward pressure on social spending. That makes it more difficult to eliminate the deficit.

Flaherty's June budget forecast a 2011-2012 deficit of $32.2 billion for the current fiscal year, down from $36.3 billion last year.

The federal finance minister has said he would be looking to find $4 billion in annual savings in his plan to balance the budget by 2014-15.

But much of his plan depends on strong growth in the economy to boost revenues. So any shortfall means Ottawa would be forced to delay balancing the books or impose more stringent cuts to reduce spending,

Flaherty spokesman Chisholm Pothier said the government is committed to returning to a balanced budget and is supporting that goal with a review aimed at eliminating ineffective government spending.

"We’re making progress on that and will report the results in Budget 2012. We will present updated economic and fiscal projections later this fall," Pothier said in an email.

Page commented on the deficit as he released a report that found spending by the federal government in its first quarter was generally in line with the plan set out in the budget.

However, the global economic upheaval has raised questions about the government's budget due to slower than expected growth around the world and the affect that will have on the revenue side of the equation.

"I don't think people anticipated just how flat world growth would be in the first half of 2011, particularly in the U.S.," Page said.

"I don't think people anticipated the policy shock that came from that debt limit debate and just watching it play out week by week in Europe over sovereign credit issues."

The report Tuesday found that total spending by the federal government for the quarter rose one per cent to almost $60 billion for the quarter compared with a year ago.

Meanwhile, operating spending in the quarter was up roughly four per cent compared with a year ago to nearly $12 billion, boosted in part by the spring election and census.

"We're going to watch that," Page said of the growth in spending.

Capital spending and transfer payments, excluding major statutory transfers such as old age security and the Canada Health Transfer, were down compared with a year ago due to the wind down of the government's stimulus program.

Capital spending amounted to about $400 million for the quarter, down from over $600 million a year earlier due to a planned decrease, while the non-major transfers totalled about $7 billion, down six per cent.

Spending on internal services, which includes communications, financial management, human resources and information technology totalled $2.4 billion for the quarter.