The Liberal government could still meet its budget targets if oil prices fall to US$25 a barrel this season and Canada’s economy only grows by one percent.
That’s thanks to a $6 billion contingency fund Finance Minister Bill Morneau has built into this year’s $29.4 billion budget deficit, though he’s not explained how he intends to use that contingency plan in the event that bearish scenario fails to materialize.
The government’s base case scenario calls for oil prices to stay at US$40 a barrel (based on the Western Texas Intermediate benchmark) but for the Canadian economy to develop at 1.4 percent this year.
If that plays out – and it is the consensus forecast among economists – then the Liberals may have an extra six billion to either help pay off debt or put into additional spending.
“By setting the bar excessively low to begin, the Finance Minister presently has plenty of room to manoeuvre on the spending front, while still striking the (inflated) deficit targets published this week,” said Robert Kavcic, senior economist at BMO Capital Markets. “In other words, when the economy performs not surprisingly, Ottawa can spend another $4 billion, and still declare that they ‘beat their deficit projection’ by $2 billion.”
Caution may be warranted, obviously, because crude prices have consistently defied any predictions made by economists. But the US$25 scenario would envision prices – which on Wednesday pushed back above US$40 a barrel – falling to a different post-crisis low and at their weakest level since 2002.
There will also be signs that Canada’s economy could surprise to the upside this year, as recent data suggests that exports are gaining strength on the back of a lower Canadian dollar and weak oil prices. All that raises questions regarding whether the contingency – the largest since former Liberal Pm Paul Martin’s $7 billion contingency in 2005 – is essential.
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Most budget contingency funds have been in existence $3 billion previously two decades, though they are usually a resource of criticism. Within the 2015 budget, the Conservatives were blasted for decreasing the contingency from $3 billion to $1 billion, with critics accusing them of making the change so they could post a pre-election surplus of $1.4 billion.
Kavcic also points out that contingencies have commonly been employed for end-of-year bonanzas. He notes that the Ontario government has employed this plan because the 2012 budget.
“In a nutshell, area of the contingency reserve and lower-than-expected debt service costs have been recycled into the budget, with a few remaining for that bottom line,” said Kavcic. “Don’t be amazed if Ottawa takes a similar tack.”
But being too rosy on oil prices and not planning adequately could have are available to haunt the federal government.
Alberta’s provincial governments have consistently overestimated the price of oil recently. The province’s finance minister, Joe Ceci, said last month that as a result of lower-than expected prices, Alberta’s deficit will balloon this year in the $5.4 billion projected in October’s budget to $10.4 billion.
