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IMF: Canada can be flexible on 2015 deficit

IMF: Canada can be flexible on 2015 deficitFinance Minister Jim Flaherty holds a news conference in Ottawa, Monday, January 27, 2014. THE CANADIAN PRESS/Fred Chartrand

WASHINGTON - The federal government can loosen its efforts to balance the budget by 2015 in the event of an economic downturn, the International Monetary Fund said Monday.

The Harper government has made a zero-deficit target a central goal of its mandate, with some of its biggest promises from the last election contingent on a return to balanced books.

In a report Monday, though, the IMF said the government has room to manoeuvre.

"Fiscal policy should strike the right balance between supporting growth and rebuilding fiscal buffers," said a report from the Washington-based agency.

"If significant downside risks to growth materialize, the federal government has room to slow its planned return to a balanced budget."

The IMF said that the government appears on track to meet its target of balancing the books by 2015 — the year of the next scheduled federal election. The Tories have set that return to fiscal surplus as a pre-condition for their plan to introduce income-splitting for couples, which was one of their biggest promise from the last election.

Finance Minister Jim Flaherty has called the balanced budget non-negotiable.

Also, the IMF said it expects the Canadian economy to improve slightly in 2014. It said the economy will grow 2.2 per cent this year, up from an estimated 1.7 per cent in 2013.

The report also pointed to some potential storm clouds on the horizon.

They include historic household debt-to-income levels, a cooling housing market, and continued risks in the U.S. and Europe that could impact Canadian exports.

The IMF also pointed out that the lower loonie hasn't managed yet to spur exports. It said the sluggishness movement was due not only to weak external demand, but also to issues with Canadian competitiveness.

It said the economy needs to shift gears, away from domestic spending to exports.

"The composition of growth does not yet point to the much needed rebalancing from household consumption and residential construction towards exports and business investment," the report said.

Flaherty welcomed the report, while making it clear that there are no plans to deviate from the budget target.

"We thank the IMF for their comprehensive reviews, and will carefully consider the recommendations made with the goal of maintaining Canada’s sound economic policies and financial sector advantage," the finance minister said in a statement.

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