Anatomy of a federal budget surplus

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Canadian Oil Industry

OTTAWA – The Harper government made good Tuesday on its promise to eliminate the deficit, making liberal use of billions of dollars in balance-sheet tweaks designed to blunt the blow of the oil-price shock.

Finance Minister Joe Oliver delivered a federal budget that boasted a narrow $1.4-billion surplus, scoring a politically critical goal just six months before a scheduled election in October.

To get there, Oliver took the unusual step of draining $2 billion out of the budget’s $3-billion rainy-day reserve, which is supposed to be set aside for unforeseeable events like natural disasters.

That adjustment was combined with several additional big-ticket changes brought in since oil prices started to free fall in late 2014, indirectly starving the government of billions in revenues.

The balance-sheet changes since the November fiscal update helped the Conservatives table their first surplus in seven years.

For example, another $1 billion was applied to the bottom line from the sale earlier this month of the government’s remaining stake in General Motors, which generated a total net gain of $2.1 billion.

The government also projected an additional $900-million net increase in revenue for 2015-16 based on changes the government hopes to make to public-sector plans for disability and sick leave — even though negotiations are still ongoing.

The blueprint also predicted the government’s bottom line will receive an extra $3 billion, thanks to the lower interest rates it’s expecting to pay on its debt.

But of the changes, Oliver faced the most questions about his decision to reduce the contingency reserve — a bookkeeping manoeuvre that ultimately enabled him to balance the budget.

During a news a conference, Oliver tried to argue otherwise, saying the cushion wasn’t needed anymore because the government had balanced the books.

“First of all, we haven’t redefined anything,” Oliver said in a vague response to a question about whether he had redefined what the government considers a contingency — a question he characterized as “creative thinking.”

The budget chewed into the emergency cushion even as it warned of global economic threats.

Oliver, who had hinted the rainy-day reserve could be in play ahead of the budget, justified the move by saying the worst of the oil slump had passed and prices had stabilized.

He was also asked why — with bargaining still ongoing — the government made the accounting decision to book $900 million for this year based on potential changes to the disability and sick-leave plans for the public service employees.

“These are good-faith negotiations, but we have an obligation and it’s in accordance with federal accounting principles,” Oliver said, before referring follow-up questions to Tony Clement, the president of the Treasury Board.

In November, the government projected a $1.6-billion surplus for 2015-16, but crude prices fell even further since then.

At the time, the calculation was based on the fact the per-barrel price of crude had tumbled to US$81, from last June’s high of US$107.

Since November, oil prices dropped to around US$45 before climbing back up to about US$56.

Tuesday’s budget document projected the government would lose billions in annual revenues as a result of the collapse in oil prices.

As a result, the challenge faced by Oliver — keeping the all-important Conservative promise to guide Canada back into the black — was a daunting one, said TD Bank senior economist Randall Bartlett.

“They met their commitment — (the budget) is not necessarily based on strong fundamentals, but they were hit with this quite significant shock,” Bartlett said.

“People may be suspect about how they’re getting there, but this is a huge (oil-price) shock.”

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