The federal government and all of Canada's provinces will post budget surpluses this year, overcoming hurdles like the US economic slowdown, a strong currency and higher interest rates, CIBC World Markets forecast on Friday.
The resilience of the Canadian economy and a strong 2006-07 budget carry-over will likely help both levels of government to overshoot their fiscal targets again in 2007-08, said Warren Lovely, senior economist at CIBC World Markets. "Official projections put the 2007-08 federal and aggregate provincial budget balances at $3 billion ($2.9 billion) each," said Lovely.
"However, robust nominal income growth hints that planning targets could again be too modest, particularly at the provincial level, where fiscal results are traditionally more tightly correlated with underlying economic conditions than at the federal level."
Canada is the only Group of Seven industrialised country to run a budget surplus. Ottawa reported a budget overhang of C$3.51 billion ($3.34 billion) in the first two months of the fiscal year, which starts in April. That was less than in the same period last year but Lovely argues that the increased spending behind the downturn was fully anticipated and takes heart in healthy corporate and personal income tax receipts.
Debt servicing costs for the federal government are at a 30-year low as a percentage of gross domestic product after paying off C$22.4 billion in debt over the past two fiscal years thanks to hefty surpluses.
Ottawa has issued C$12.9 billion of nominal bonds so far this fiscal year, leaving $20 billion to go. The stock of federal bonds is in its 10th straight year of decline, said Lovely. Ontario, which many expect to crank up spending ahead of the October provincial election, is the province whose budget runs closest to the line. Alberta, flush with oil money, accounts for a disproportionate amount of the combined provincial surplus, said Lovely. The total surplus of all 10 provinces shot to a record high of C$13.6 billion last year.
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