Exploring the federal budget’s economic outlook

Budget contains a whack of projections based on private-sector forecasts predicting better days ahead. What could possibly go wrong?

April 24, 2015   by The Canadian Press

OTTAWA — At a time of economic uncertainty, the Harper government has delivered a budget that contains a whack of projections based in large part on private-sector forecasts predicting better days ahead.

As a result, the assumptions in the budget – the government’s first balanced fiscal plan in years – prompt one question in particular: What could possibly go wrong?

The degree of potential fragility in the blueprint’s predictions depends on who you ask, though many experts agree forecasting the economy’s future beyond the short term is often anyone’s guess.

For example, the budget said the country would shake off the economic sting of the oil slump and produce an average growth in real gross domestic product of 2% in 2015, followed by 2.2% in 2016.


It also included predictions for oil prices, which have been cut in half since last summer. The forecasts say oil prices will average US$54 per barrel in 2015 before climbing modestly in each of the next three years to hit US$78 by 2018.

The government concluded that last month’s private-sector projections were prudent, though it acknowledged there remained “uncertainty over the magnitude of the impact of lower oil prices on the Canadian economy.”

Most of the potential threats to the GDP and oil-price outlooks are external, the budget said.

Experts have warned that Canada faces economic threats such as slowdowns in places like China, stagnation in Europe and flat growth in world crude prices – or even another slide.

The volatility could mean the final numbers will look very different from the budget’s outlook, which includes a $1.4-billion surplus projection for 2015-16.

“We are in a relatively uncertain kind of environment right now in terms of the economy,” assistant parliamentary budget officer Mostafa Askari said Wednesday.

Nobody knows the full extent of the economic damage Canada suffered from the crude-price shock, Askari noted. Even a slight difference between the budget’s oil-price projections and the eventual crude prices would mean a big swing in how much revenue the government rakes in, he added.

“It could be more positive or it could be more negative,” Askari said of the forecasts. “It could go both ways.”

Jack Mintz, a tax policy expert from the University of Calgary, described the budget’s projections as “pretty prudent,” particularly since he thinks the private-sector oil-price forecasts came in a little low.

Mintz said the oil market is often unstable and, in general, the hardest economic projections to get right are longer-term ones.

“Who knows? It’s a real mug’s game out there,” he said of where things will land down the road.

That’s not going to prevent experts from continuing to make predictions, regardless of the challenge of nailing economic forecasts.

Last week, the Bank of Canada projected real GDP growth in 2015 to register 1.9 per cent, a downgrade from its 2.1% projection in January. It also predicted 2.5% GDP growth next year.

Even the central bank’s governor, Stephen Poloz, has acknowledged in the past just how difficult it can be for experts to get it right these days – even on their short-term forecasts.

Following the dismal first quarter of 2015, a cautious Poloz said in a speech last month that he’s hoping the bank proves correct in its prediction that the economy would turn things around in the second quarter.

“We’ve got our fingers crossed,” he said.

© 2015 The Canadian Press

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