The economy lost almost 46,000 jobs in December and the unemployment rate rose to 7.2 percent, with all job losses concentrated in full-time positions. In 2013, only 102,000 net jobs were created, the worst job creation record since 2009, with most of the gains in part-time employment.

Not great news for the government.  So why is the Finance Minister Flaherty boasting that the Government will record a larger surplus in 2015-16, than what he forecast only a month and half ago? Shouldn’t he be more concerned about the lack of growth and job creation? Shouldn’t he at least consider the recommendation of the International Monetary Fund in its October review of Canada, that “there is room to delay the adjustment needed to return to a balanced budget in 2015, if there is no meaningful pick-up in economic growth”? Well not surprisingly, he isn’t and he won’t.

With Parliament off on its winter break and a lack of any news out of Ottawa, speculation has started on the timing of the upcoming federal budget and what it may include. Just last week, the Globe and Mail reported that the Government is planning a bare-bones budget in early February, saving major policy announcements for the 2015 budget, just in time for the 2015 election. With Canadians focussed on the Olympics, the 2014 budget would be a one-day event, quickly forgotten. It would, however, also show a government without any real strategy, other than deficit elimination, for dealing with a struggling economy. This is a Government that is absolutely committed to a "voo-do"policy of austerity-driven growth.

Of course, even a “bare-bones” budget does not preclude another 1,000-page budget omnibus bill. As in the past, the “real” budget will be the budget omnibus bill. One could reasonably expect that the Government will spell out in more detail its “balanced budget legislation”, referred to in the Speech from the Throne

In a recent blog we suggested that Prime Minister Harper and Finance Minister Flaherty needed to resurrect their reputations as “sound economic and fiscal managers” and that the 2014 budget presented them with a good opportunity to begin that process. We suggested that the Government use the 2014 budget to set out its long-term vision for the Canadian economy and how it would use the projected surplus, apart from fulfilling its 2011 election promises.

Such an approach would force the Opposition parties to respond with their own long-term economic and fiscal strategies, probably earlier than they are prepared to do. It would force them to reveal their plans for using the surplus. Hopefully, it would put “sound economic and fiscal management” at the centre of a public discussion, something that has been missing for the past 12 months if not longer.

However, according to the Globe and Mail, this approach to the 2014 budget has been rejected. In fact, it was probably never even considered. Instead, the Government will present a budget, perhaps in February, which simply up-dates the fiscal numbers, surrounded with a lot of rhetoric about how lucky Canadians are compared to everyone else living in some other advanced economy. However, recent polling suggests Canadians are no longer buying this worn out narrative. It will take a lot more than repetitive, and out of date rhetoric, to turn public opinion around.

To this end, Finance Minister Flaherty has started to boast that the surplus for 2015-16 will be much larger than what he forecast in his November 2013 Update. He hopes that this will convince Canadians, or more importantly the Conservative base, that the Government is on the right track, despite the bad economic numbers. More than likely, it will simply raise questions about the credibility of the Minister and his own budget projections. What has happened since November to make him so much more optimistic about the size of the surplus? Why should Canadians feel more confident about their economic prospects?

Certainly, the monthly financial results, as reported in the Fiscal Monitor, do not suggest any significant improvement, if any improvement at all, in the deficit outlook for 2013-14, that might lead to a lower deficit in 2014-15 and a larger surplus in 2015-16.  However, to be fair, monthly results were not a good indicator of the final results for 2012-13, thereby undermining the credibility of the Fiscal Monitor itself. To date, Minister Flaherty has been unable or unwilling to explain why the deficit for 2012-13 came in so much lower than what he forecast in the March 2013 Budget  or why the monthly results to the end of March 2013 were so far off the final outcome for 2012-13.

Could stronger global economic growth or a stronger Canadian economy lead to a larger surplus in 2015-16?
There is a growing consensus that growth in the U.S. will accelerate and could reach 3 per cent, but stronger economic growth in the U.S. has already been assumed in the Fall Update. There is no consensus in the U.S. about growth prospects after 2014.  Further, the EURO area continues to struggle and growth in China and other major emerging markets continues to slow and is unlikely to recover in the next few years. It is unlikely that growth in the Canadian economy in 2014 and 2015 will be much faster than already assumed in the Fall Update.

Some private sector economists expect that the federal budget will be in balance in 2014-15. It is hard to understand the basis for their forecast.  An improvement of only $1.0 billion is projected in the deficit for 2013-14.  This would increase to $2.5 billion if the “risk adjustment factor” of $1.5 billion included in the November 2013 Update estimate for 2013-14 is not required.  One would have expected a much larger improvement for 2013-14, given that the deficit declined by $7.4 billion in 2012-13.

Economic growth forecast for 2013 is comparable to that witnessed in 2012 while the incremental impact of restraint measures announced in previous budgets is estimated at about $5 billion, only slightly lower than that estimated for 2012-13. However, monthly financial results to date do not point to a larger improvement in 2013-14.

Thereafter, solely due to a strong rebound in economic growth, much larger improvements in the budgetary balanced are forecast.  However, economists have been predicting a rebound in economic growth for the past three years, only to be proved wrong. Furthermore, such annual improvements appear overly optimistic, and would require significantly stronger global economic growth than is likely. 

In his meeting with provincial finance ministers on possible reforms to the Canada Pension Plan (CPP) in December, Minister Flaherty indicated that global economic growth was too uncertain and that the domestic economy was too fragile to consider structural changes to the CPP at this time. Recent data show that he may in fact be right about global economic growth and domestic economic fragility.

Yet despite these developments, less than two months after the release of the Fall Update, Minister Flaherty is talking about a much larger-than-expected surplus in 2015-16.  Such a surplus could only come from stronger-than-expected economic growth, which would undermine his claims that the economy is too fragile and evidence to date, or from the Finance Department “hiding” additional “revenue and spending buffers” in its November 2013 Update fiscal projections, which will magically materialize.

In the end, Minister Flaherty seems confused and that makes everyone else confused. According to the Minister, the global economy is too uncertain (true) and the Canadian economy is too fragile (true), but, on the other hand, he expects much larger surpluses than forecast less than two months ago. We expect Minister. Flaherty to pull a lot of “white surplus rabbits” out of his “Finance Magician Hat” in both the 2014 and 2015 budgets.

If Minister Flaherty does deliver a February budget, then there will be one very important benefit for Parliament. It will mark only the third time since taking office in 2006, that the Government has tabled the budget before the Main Estimates. This may sound trivial and mundane, but it isn’t. In such a scenario, the Main Estimates should be based on budget economic assumptions and spending plans. It means that the Finance Department and Treasury Board Secretariat should be in a position to provide a detailed and credible reconciliation of their respective spending numbers. It will mean that Parliament will have compatible spending estimates to review.

This alone would justify a February budget