But the new assessment from the parliamentary budget office also projects that the government will be able to achieve its target of a balanced budget in 2015 and even amass a bigger surplus in the critical election year than the government projects.
The report says its baseline projection puts the 2015 budget surplus at $4.6 billion — almost $1 billion more than the official estimate contained in last month's economic update paper.
As well, the budget office projection shows next year's deficit at $3.5 billion — $2 billion lower than Ottawa's estimate in last month's economic update — and within an eyelash of a balanced budget, once a $3-billion cushion for surprises is factored out.
But the report shows that the improvement from the economic update is dependent not so much on a strong economy but on extraordinary measures and keeping payroll taxes higher than need be.
"If direct program expenses do not materialize as planned, if a governor-in-council decision is made to reduce EI premiums and if sales of public assets are delayed or do not occur, most, if not all, of the ... surplus the government projects for 2015-16 would be eliminated,” the report said.
A big chunk of the 2015-16 and 2016-17 surpluses is based on Flaherty's stated intention to keep EI premiums frozen until 2016, the report states.
Under normal rules, the budget office said, premiums should start coming down in 2015 when the EI fund flips from deficit to surplus.
The fiscal impact of keeping premiums artificially higher for two additional years is that it will contribute $1.8 billion to the 2015-16 surplus and $3 billion to the 2016-17 surplus, the report said.
The budget office also believes Ottawa will realize greater savings from a recently announced two-year departmental spending freeze and the departmental spending lapses that have averaged $10 billion annually over the last three years.
The freeze and lapses — approved money that is not spent — will net Ottawa about $2.7 billion in the critical 2015-16 fiscal year, the PBO says, and $7.2 billion over the five-year projection period.
In addition, the report points out that the surplus partially depends on Flaherty going ahead with announced asset sales, such as the sale of the Ridley Terminals and Dominion Coal Blocks in British Columbia announced in last month's update, as well as the government's remaining stock of General Motors shares.
The findings back Liberal finance critic Scott Brison's contention made after the update's release last month that Flaherty's surplus was being constructed on "smoke and mirrors," and not on a strong economy.
Still the PBO gives Ottawa 65 per cent probability of achieving its target of balancing the budget in 2015, even though the office believes economic growth will actually be weaker than Ottawa is counting on.
That is welcome news for the Harper Conservatives. Although economists say financial markets are unconcerned about the exact timing of attaining a balanced budget, achieving the 2015 target is of singular importance to the government's re-election prospects.
In the 2011 campaign, the prime minister said he would offer Canadian couples with children under 18 the option of splitting their income to reduce taxes — but only once the budget was balanced. By some calculations, that would deprive Ottawa of about $2.7 billion in revenues.
Harper also promised several other boutique tax cuts, as well as a doubling of the $5,000 annual limit on contributions to tax-free savings accounts, all of them contingent on balanced books — pledges that would shave a total of about $600 million more from tax revenues.
Flaherty said last month he prefers a cautious approach to spending the surplus, but that may be dependent on just how large it turns out to be.
The PBO's projections suggest that surpluses won't be massive going forward, however, in part because after 2015-16 the government's restraint programs are scheduled to end and in part because the economy — which is now in catch-up mode — will likely slow to cruising speed of about two per cent a year. As well, with interest rates anticipated to rise, Ottawa will need to pay more to service a national debt that will be well north of $600 billion.
The PBO estimates that after achieving a $4.6 billion surplus in 2015-16, the surpluses in the next three year will come in at $5 billion, $4.7 billion and $7.5 billion.
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