Watchdog, Ottawa differ on Canada's budget balance

Canada's budget watchdog sees the federal government's structural balance as at least C$10 billion ($9.71 billion) lower per year than Ottawa estimates, and called for more disclosure of assumptions and methodology used in drafting forecasts.

The Parliamentary Budget Officer said the discrepancy was likely caused by different estimates on how the economy is performing at any given time in relation to its potential to grow. Miscalculations can lead to bad policy decisions, it suggested.

PBO believes that estimates and forecasts of structural budget balances provide useful information about a government's underlying financial position and can be used to help guide policy actions, the agency said in its report.

The structural budget balance, as opposed to the actual balance, provides a snapshot of the underlying health of government finances when the economy is operating at full speed. The existence of a long-term structural deficit, even after full economic recovery, would require additional measures by Ottawa to return to balance.

The Conservative government and Kevin Page, head of the PBO, have clashed for years over the nature of the deficit, a politically sensitive topic in Canada after an 11-year string of surpluses made it the darling of the G7 rich nations club.

Finance Minister Jim Flaherty has referred to the current budget deficit - small by global standards at just under 2 percent of gross domestic product - as the result of cyclical changes in the economy, namely the recession resulting from the global financial crisis and extraordinary spending as part of an internationally co-ordinated stimulus program.

Ottawa expects to see a small surplus by 2015-16 but the PBO's Page predicts a persisting structural deficit.

The PBO report says the Department of Finance's estimates suggest the C$42.6 billion budget deficit recorded in 2010 was entirely cyclical in nature, while the Parliamentary Budget Officer judged it was about 40 percent structural.

In the 1976-2005 period, the government and PBO estimates of the structural budget balance were quite similar. But for the 2006-2010 period, the PBO's estimates were about C$10 billion lower. In 2010, its estimate was C$17 billion lower.