Finance counsels

Canadian Finance Minister Jim Flaherty’s March 4 budget may include a stronger forecast for 2010 economic growth, a survey of analysts showed, giving him more scope to fight the country’s rising debt burden.

Canada’s economy will expand 2.7 percent in 2010, faster than the 2.3 percent projected in the September fiscal update, according to a Bloomberg survey of 14 of the 16 forecasters Flaherty consults for his budget. Flaherty will meet the 16 economists from banks, universities and research institutes in Ottawa tomorrow to gather their projections.

Faster growth in 2010 may help propel Prime Minister Stephen Harper’s plan to shift the government’s focus to eliminating the deficit, which could sustain demand for Canadian debt at a time when opposition lawmakers and economists question the government’s ability to balance the budget.

“That’s meaningful, and that’s clearly a welcome development,” said Warren Lovely, a government strategist at Canadian Imperial Bank of Commerce in Toronto. “It’s safe to say that Ottawa and economists generally are encouraged by recent developments and specifically encouraged by evidence the recovery is really taking root here.”

Lovely said the economic forecast is just a “starting point” on which to base the budget, and investors will be focused on the plan “to get back to balance.”

Canada’s nominal output, which is not adjusted for inflation and is the broadest measure of the tax base, will expand 5.1 percent this year, up from 4.1 percent forecast in September, according to the Bloomberg survey.

Lowest G-7 Debt

While Canada’s debt is rising, it has the lowest debt-to- GDP ratio in the Group of Seven countries. Long-term Canadian bonds have outperformed U.S. treasuries over the past year on Canada’s stronger fiscal position.

U.S. 10-year Treasuries yielded 31 basis points more than equivalent-maturity Canadian bonds on Jan. 28. The U.S. bonds yielded, on average, about five basis points over the Canadian securities in the past year, according to Bloomberg data.

Government bonds fell today, with the yield on Canada’s benchmark 10-year note rising one basis point to 3.36 percent at 9:19 a.m. New York time. The price of the 3.75 percent security due in June 2019 fell 9 cents to C$103.09 ($96.57).

“The fundamental point is that Canada’s fiscal position remains superior, much superior to the U.S. in particular, and that there is continued scope for significant outperformance in the longer end of the yield curve,” Lovely said.

Generate Revenue

Canada, which revised its fiscal forecasts in September, estimates a budget deficit of C$55.9 billion in the year ending this March, and a 6-year funding gap of C$164 billion. The federal government estimates it will need to borrow about C$100 billion this fiscal year, raising its debt to a 9-year high of C$519.6 billion by March 31.

Faster growth this year would allow Canada to generate a total of C$76 billion more in output over the next six years, according to Bloomberg calculations based on the forecasts. Canada generates about $15 billion in revenue for every C$100 billion of output, according to the government’s last fiscal update.

“It’s not completely a game changer, but it is a little bit of padding that will be appreciated at a time like this,” said Eric Lascelles, chief economics and rates strategist at TD Securities Inc. in Toronto.

Statistics Canada said last week that the economy expanded a faster-than-expected 0.4 percent in November, and raised its growth estimate for the two prior months.

While raising their 2010 forecast, the analysts cut their outlooks for 2012-2015, suggesting revenue gains may fade over time. Two of the 16 groups that will meet Flaherty this week — Caisse de Depot et Placement du Quebec and Milton, Ontario-based Centre for Spatial Economics — declined to take part in the Bloomberg survey.

‘New Normal’

Forecasts for slower growth in the final years of the budget horizon underscore concerns by the parliamentary budget officer that Canada’s long-term growth potential is limited, which will undermine the government’s ability to erase the deficit.

Bank of Canada Governor Mark Carney said Jan. 21 that the “new normal” for potential growth won’t be much greater than 2 percent beyond 2011, because of low productivity gains and an aging workforce. Carney also has said Canada will rebound more slowly from last year’s recession than it has previously.

Flaherty said Jan. 15 in Toronto that the country isn’t running “structural” deficits and will return to balance as the economy recovers without additional measures such as tax increases.

“There is a considerable range in the medium-term economic forecasts of the private sector, but they all suggest the federal budget cannot be balanced within the next several years without the application of some policy restraint,” Don Drummond, chief economist at Toronto Dominion Bank, said in an interview. “If tax increases are to be avoided, the restraint must come through lowering the rate of growth of program spending.”

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