Cuts will tame deficit but hurt economy, watchdog warns

Government spending restraint and cuts will likely lead to balanced budgets but also slower economic growth and 100,000 lost jobs, Canada's budget watchdog said Wednesday.

Government spending restraint and cuts will likely lead to balanced budgets but also slower economic growth and 100,000 lost jobs, Canada's budget watchdog said Wednesday.

Parliamentary Budget Officer Kevin Page's latest economic and fiscal report is surprising in that it agrees with the Harper government that the budget will be balanced in 2015-16 — maybe even a year earlier.

But it says fiscal soundness carries a heavy price, with Ottawa taking $52 billion out of the economy and the provinces adding another $9 billion of drag.

"The PBO expects that restraint and reductions in government spending on programs in Canada will act as a drag on economic growth and job creation, pushing the economy further away from its potential (gross domestic product) and delaying the economic recovery," the report states.

PBO will speak Thursday

Page is due testify before the Commons finance committee on Thursday and is eschewing media interviews until after he speaks to MPs. The report, however, was posted on the PBO website Wednesday.   

The report says it incorporates Finance Department multipliers on jobs and growth for its projections, and is taking the government at its word that it will limit spending increases while chopping 19,000 public servants.   

Ottawa's planned restraint and reductions in program expenses will reduce its share of the economy from 7.3 per cent in 2010-11 to 5.5 per cent in 2016-17.   

That will have a direct impact on the economy, the Page report stresses.   

It projects the spending restraints and cutbacks will reduce economic output by 0.3 per cent this year, climbing to 0.88 per cent in 2014.   

Canada's economy, subsequently, will grow by only 1.6 per cent in 2013, eight tenths of a point less than forecast by the Bank of Canada and the private sector consensus.   

On the jobs front, restraint will result in about 18,000 fewer jobs this year than had there been no restraint, climbing to 108,000 less employment in 2015. Most of the losses are due to Ottawa's actions, although provincial restraint is also a factor.    Unemployment, currently at 7.2 per cent, will climb to 7.9 per cent in 2013, the report predicts.   

Both scenarios are significantly gloomier that the consensus of economists, which the PBO attributes to calculating a bigger drag from public sector restraint and higher weighting for downside economic risks.   

The spending restraint and public service cutbacks — particularly for Ottawa — will have the desired effect on the government's books, however.   

Page predicts the Harper government will indeed be able to balance the budget when it says it will, in 2015-16, and may even achieve the feat a year earlier. As well, Ottawa will come in with a healthy $10.8 billion surplus by 2016-17, about $3 billion more than the budget estimate.   

The PBO has been critical in the past of Ottawa's overly optimistic projections on the fiscal balance, but now seems to be on the same page with only minor differences.   

As well, it says the federal government will eliminate its underlying structural deficit as early as next year, with only the slack in the economy keeping Ottawa in deficit a few years longer.   

"The projected improvement in the government's budgetary balance over the medium term primarily reflects its policy actions to reduce and restrain direct program expenses and is therefore structural in nature," the report explains.