OTTAWA—Prime Minister Stephen Harper’s government faces a
roller-coaster ride in the coming months as it tries to balance
Ottawa’s books and implement a lavish program of family-oriented
tax cuts and spending in advance of an election.
The Conservatives have been saying 2015 will be the year they
end seven years of consecutive budget deficits and bring in
billions of dollars worth of goodies for voters in keeping with
promises made in the last election in 2011.
But the linchpin of this strategy — running a budget surplus —
has been thrown into doubt by the sudden, unexpected plunge in
world oil prices.
Depending on what happens to the always volatile price of a
barrel of crude, the Harper government could find itself on the
verge of an embarrassing slide back into a budget deficit in
In the past four months, the government
new spending and tax breaks that will cost the
federal treasury about $5 billion annually, reducing the
forecast budget surplus for 2015 to a meagre $1.6 billion.
But world oil prices have continued to plumb unexpected lows.
The economic impact of the global price shift will vary across
the country but is expected to reduce the overall growth of
Canada’s economy. And it will reduce the taxes that Ottawa
collects, further imperiling Finance Minister Joe Oliver’s
predicted budget surplus.
Oliver has an escape hatch in his fiscal plan in the form of a
$3 billion contingency fund on which the government can draw to
keep from running a budget shortfall. But even with that extra
$3 billion, the current level of oil prices will make it hard
for the Conservatives to avoid a deficit in 2015, economists
“I am a bit concerned that the government’s earlier crowing of
us heading into surplus may have been a little bit premature,”
says BMO chief economist Doug Porter. “It’s quite possible we
could be looking at another year of deficit in 2015 if oil
prices stay at these levels. It’s a close call.”
Harper said in early December the government is not concerned
about the possibility of winding up in a budget deficit in 2015.
He noted the estimates in Oliver’s Nov. 12 economic statement
took into account the declining world price for oil.
“In the fall economic and fiscal update, the minister of finance
made considerable allowance for additional uncertainty generated
by the falling oil prices,” Harper said. “So we remain very
confident that the budget will be balanced next year.”
But Oliver’s calculations in the
were based on a price of $81 (U.S.) per barrel. At
that price, the Finance Department calculated Ottawa’s revenues
would drop by $2.5 billion a year. But since then, the price has
plummeted to about $53 per barrel. If the price stays in that
range, it could reduce the federal’s government’s budget surplus
by another $2.5 billion a year, according to a study led by CIBC
chief economist Avery Shenfeld.
“Ottawa’s hit would be on the order of $5 billion” if oil prices
stay down in 2015, CIBC economists concluded in a recent study.
“While half of that damage was factored in to the last fiscal
update, there’s a further $2.5 billion-a-year downside
adjustment still to be realized, which would put a crimp into
the room for any initiatives in the upcoming budget, or even
force some yet-to-be-announced restraint,” CIBC says.
If a budget deficit looms, the federal government might opt to
keep its spending down with cuts to services of the kind that
have angered veterans or forced Ottawa to hire 400 contract
employees to deal with a wave of complaints about wait times for
employment insurance claims.
How this unpredictable scenario evolves will be crucial as the
political storyline plays out in advance of the election
expected in October. Pocketbook issues will be front and centre,
with voters looking for responsible fiscal management coupled
with pledges of new programs and services after years of
In the fall, Canada’s economy had been showing signs of
considerable momentum, with unemployment down significantly to
6.6 per cent. But the economic outlook has been clouded by the
oil price shock.
What had been expected to be fairly strong growth in 2015 in the
2.5 per cent range appears likely now to come in at a modest 2.2
per cent or so, not enough to bring further improvements in the
On the wider strategic stage, the government’s central economic
plan of sustaining long-term economic growth by expanding oil
sales abroad remains in limbo with strong opposition to Keystone
XL and other proposed export pipelines. The prospects of
building new pipelines to carry oilsands-derived crude to export
terminals became even more complicated in 2014, when, in the
Tsilhqot’in First Nations decision, the Supreme Court of Canada
reinforced the need to obtain natives’ consent for such
The Conservatives’ lack of action on their long-promised
regulations to reduce greenhouse gas pollution from the oil and
natural gas industry could assume new political importance.
Harper’s response to climate change has drawn the ire of
environmentalists all over the world, with some saying Ottawa’s
approach has given U.S. President Barack Obama political cover
to keep postponing a decision on whether to build the
Canada-to-U.S. Keystone line.
Jim Prentice, the former federal environment minister who is now
Alberta premier, has been critical of his former boss’s approach
to the environment, and Harper appears to be trying out a new
line in advance of the election. In a year-end interview with
CBC, Harper praised Alberta’s carbon-pricing scheme, saying
“it’s a model on which you could go broader” to create
greenhouse gas controls on a North American basis.
The Alberta model requires large industrial emitters to pay $15
per tonne (a fee that may rise) into a technology fund if they
don’t meet emissions control targets. But anything to do with
carbon pricing is a tightrope for the prime minister, who
refuses to even refer to the Alberta carbon price as a “levy,”
preferring to call it a “tech fund.”
It’s a sensitive topic for Harper because his party denounced
the Liberals’ carbon-pricing scheme on the way to winning the
2011 election and continually berates the NDP for its proposed
cap-and-trade plan for limiting emissions, a strategy the
Conservatives deride as a “$20 billion job-killing carbon tax.”
Harper’s move in recent months to announce tax goodies and new
spending on families worth $5 billion a year may have been
premature, given the impact of crashing oil prices. But it still
had the effect of leaving Ottawa’s fiscal cupboard bare — thus
making it more difficult for the NDP and Liberals to trot out
expensive new promised social programs in advance of the
Most prominent among NDP Leader Thomas Mulcair’s policies is a
national daycare plan, cost-shared with the provinces, that
would set Ottawa back $1.9 billion annually as of 2018. To help
pay for it, the NDP would partly roll back recent Conservative
cuts to corporate income taxes.
Liberal Leader Justin Trudeau says if in power he would cancel
the income-splitting tax cut announced by Harper. The plan,
which would cost Ottawa $2 billion a year in foregone revenues,
has been widely criticized because it would benefit only 15 per
cent of families, mainly those with one breadwinner in a high
income-tax bracket. The savings would be used to pay for
economic growth projects, education and other programs Trudeau
says would benefit middle-class Canadians.
By the numbers
$5 billion: the approximate annual cost of tax breaks and
spending recently announced by the Conservative government
$3 billion: value of the contingency fund the Conservatives may
have to use in their bid to reach surplus
$81: price per barrel of crude oil used in November government
$53: current price per barrel
7: number of consecutive annual budget deficits the government