11/08/2011 04:00 EST | Updated 01/07/2012 05:12 EST

Canada Fall Economic Update: Ottawa Likely To Miss 4-Year Balanced Budget Target

Finance Minister Jim Flaherty conceded Tuesday he won't be able to balance the federal budget in four years as promised, but he moved to lighten the load on workers and businesses by reducing a planned increase in payroll taxes.

Warning Canada's economic recovery is fragile and slowing, Flaherty told a business audience in Calgary he is ready to go further if conditions continue to deteriorate.

As he was preparing to make the speech, the European debt crisis claimed another political victim — Italian Premier Silvio Berlusconi, who announced he would resign like his Greek counterpart in the wake of unsustainable borrowing.

"We are well aware of the challenges ahead to the global economy and how that may impact Canada," said Flaherty, who has been an outspoken critic of the eurozone's political response to the crisis.

"Let me be clear. We will not be bound by ideology when it comes to making decisions to keep our economy strong and protect Canadians, their financial security and jobs."

During their winning election campaign this spring, the Harper Conservatives trumpeted their achievements on the economic front by boasting they would balance the budget one year earlier — in 2014-15 — than previously projected.

But Flaherty heard from economists last month that the budget assumptions of economic growth were no longer applicable, which would mean Ottawa's revenues from tax receipts would be lower than anticipated.

As well, the economists warned the minister that the risks of an even worse outcome were rising.

Plugging in the new numbers means Ottawa's deficit will balloon from the previously thought $19.4 billion next year to $27.4 billion, and for 2013-14, from $9.4 billion under the old estimate to $17 billion.

The changes throw into question whether the Conservatives can fulfil election promises that were contingent on a balanced budget within their current mandate.

During the campaign, Prime Minister Stephen Harper promised to allow households to share up to $50,000 of income for tax purposes — a limited form of income splitting — which would save families an average of $1,300 a year. The $75 adult fitness tax credit was also contingent on eliminating the deficit.

Ottawa was counting on savings from departmental cutbacks to put them into the black in 2014-15, but now the expectation is for a $3.5 billion deficit, once $4 billion in savings are included. Without counting the savings, the projected deficit would have been $7.5 billion.

In total, the government is adding about $29 billion in red ink from the current year to the end of the planning horizon in 2015-16.

According to the government's new fiscal track, the government will record a tiny $600 million surplus in 2015-16, but that is only if all the savings from cutbacks are realized.

Bank of Montreal chief economist Sherry Cooper said Flaherty was reacting to the new realities of the global economy.

When one sticks to a forecast despite changing circumstances, "that is a bigger risk than being adaptable to what is going on around us," Cooper said.

In a news conference, Flaherty said despite the bleaker outlook, the likelihood of Canada entering another recession in the near term is slim.

"It's certainly not what's anticipated by any of the private sector economists or by the department of finance. What we anticipate is modest economic growth," Flaherty said.

The changes to employment insurance premiums were leaked to some news media late Monday night and are minor in nature.

Ottawa will cut in half payroll taxes increases scheduled to go into effect Jan. 1 that would have raised premiums on workers by 10 cents per $100 of insurable earnings, and 14 cents for firms.

The changes will mean workers earning the maximum $43,000 of insurable earnings can expect to see their take home pay shrink by about $23 a year, while firms will be paying an additional $31 a year per employee.

As well, the government will also extend for another 16 weeks, until next October, the work-sharing program that gives employees the option of working fewer hours — to permit a co-worker to keep their job — and receive Employment Insurance benefits for the subtracted hours.

The government said the hit to its revenues will be $600 million next year, adding that it plans to return to the normal 10-cent premium increase in 2013.

"We will continue to make protecting Canadian jobs and the economy our top priority," Flaherty said.

Still the changes are unlikely to satisfy critics who believe Ottawa needs to do more to stimulate a fragile economy projected to record at best modest growth for the next year and a half.

"With stubbornly high unemployment, it is dumb and dangerous to increase the price of hiring by hiking taxes on jobs," said Liberal finance critic Scott Brison.

The Canadian Federation of Independent Business, which had lobbied for the cancellation of the payroll tax hikes, took comfort that a half loaf was better than none.

"But the bad news is unless your employer comes up with a raise for you, your take home pay is going to go down," said Dan Kelly, the CFIB's head of legislative affairs.

However, a group representing the food services industry said the planned EI changes will still hit restaurant employers with a $13-million payroll tax increase.

"We appreciate that the EI increase could have been double, but any increase at all is bad news for employment in this economy," said Garth Whyte, president and CEO of the Canadian Restaurant and Foodservices Association.

"This is especially true for us as a people industry, where opportunities for job creation are the greatest."

The Canadian Chamber of Commerce welcomed the payroll tax and work-sharing moves, which it said are positive for the economy.

"Both of these measures will help to support employment during a time of heightened economic uncertainty," said Chamber president and CEO Perrin Beatty, a former federal revenue minister.

The Canadian Labour Congress said it was pleased Ottawa is showing some fiscal flexibility, but said more needs to be done.

"But this is far from the plan that we need to deal with a slowing economy and rising unemployment," said CLC president Ken Georgetti.

"Minister Flaherty still plans to cut $4 billion from annual federal government spending, and nothing that he said today will stop unemployment form rising."

In his speech, Flaherty said while it is important to show flexibility, the government can't afford to break the bank either.

He noted that other countries, particularly in Europe, are failing to grapple with the nightmare of too much debt.

"Countries, like individuals, do not stumble into prosperity," he said. "They set out a plan and stick to it, so that they are fully capable of seizing opportunity when misfortune hits, instead of being overwhelmed by it."

As such, Flaherty said he is sticking to the broad strokes of his June budget, which phased out stimulus spending in infrastructure and announced plans to keep government spending growth to about two per cent.

The minister said he is also committed to cutting the corporate tax rate by 1.5 points to 15 per cent on Jan. 1, saying low taxes are one of the reasons the country is getting plaudits as a good place to invest.

In an unrelated announcement, the minister said the government had renewed its agreement with the Bank of Canada keeping the central bank's marching orders of targeting inflation at two per cent annually in place for another five years.

— Julian Beltrame reported from Ottawa and Lauren Krugel reported from Calgary.