OTTAWA (Reuters) – Canada's economy and fiscal health will fare worse than expected in coming years, the country's budget officer said on Wednesday in a downbeat report days ahead of the government's budget.
The Parliamentary Budget Officer (PBO) issued a report providing the office's own economic growth forecasts for the first time, rather than using the consensus private sector forecasts published by the government.
It predicted the government would not be able to eliminate the federal deficit by 2014-15 as it has planned due to higher projected operating expenses.
Mediocre growth, unemployment remaining above 7 percent until 2016 and a persistently strong Canadian dollar mean the Bank of Canada will be reluctant to raise interest rates too quickly, it said.
"Reflecting the sluggish recovery, PBO projects that the output gap will close gradually, restraining the pace of interest rate hikes by the Bank of Canada," said the report.
The PBO's fiscal outlook excludes new measures announced by the government in its March budget, which was never adopted because of the general election. The Conservatives, who won a majority on May 2, will present another budget on Monday, which they say will be largely the same as the previous document, with some minor tweaks.
The PBO sees a budget deficit in 2011-12 of C$26.1 billion, slightly below Ottawa's latest projection of C$27.8 billion.
While the Conservatives predict a return to balance in roughly 2014-15, the PBO sees a shortfall of C$13.3 billion that year and C$7.3 billion the year after.
"PBO's estimate of the structural deficit does not mean that the government's budget will not return to balance or that its fiscal structure is not sustainable," the report said.
"Rather, it suggests that policy actions to increase revenues and/or reduce spending would be required to ensure that the budget is balanced once the economy returns to its potential."
Gross domestic product will grow 2.9 percent this year, the PBO estimated, in line with government forecasts. Growth in 2012 and 2013 will be below government forecasts at 2.2 percent and 2.3 percent, respectively.
PBO projects budgetary deficits totaling $128.2 billion from 2010-11 to 2015-16, compared with the C$93.6 billion projected by the government.
Finance Minister Jim Flaherty responded to the PBO report by suggesting Budget Officer Kevin Page should read the March budget proposal to see how Ottawa plans to return to surplus.
"It's all set out how we would do it. It's in the budget that we filed March 22," Flaherty said.
The cost of measures announced in the March budget -- and excluded from PBO's calculations -- totaled C$7.6 billion over six years, the government said at the time. It also said it had found savings of C$6.2 billion over five years.
In addition, it promised to squeeze out an additional C$11 billion in savings between now and 2016 but did not include those savings in its projections.
Ottawa has said the budget will restate commitments made in the original plan and add a couple of campaign promises.
On Tuesday, Flaherty said the spending plan will use the same economic growth forecasts as the original budget, which assumed 3.1 percent expansion this year and 2.8 percent in 2012.
(Reporting by Louise Egan; editing by Rob Wilson)
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