Looking ahead to his budget, expected in March, Finance Minister Jim Flaherty will need more than the luck of the Irish, he鈥檒l need a crystal ball.
Or, as the Finance Department put it in unusually clear language in Flaherty鈥檚 fall update: 鈥淭he global economic outlook remains highly uncertain.鈥� That鈥檚 for sure.
There would be two things keeping Flaherty up at night over the 12 days of Christmas. One was the looming 鈥渇iscal cliff鈥� in Washington over taxes, spending cuts, the deficit and the debt ceiling, which was resolved this week. Flaherty worries about the dysfunctional character of the U.S. political system. And so he should, especially in terms of potential collateral damage to Canada.
Then there鈥檚 Europe, and its sovereign debt and banking crisis. Without Germany holding it together, the eurozone would be in peril of failure.
In one of the bailed-out countries, Spain, youth unemployment is a shocking 45 per cent.
Back in the United States, the Federal Reserve has said it will keep interest rates near zero until unemployment falls below 6.5 per cent from current levels of 7.7 per cent, which the Fed predicts could take as long as three years. This means the Fed will continue to flood the market with cheap liquidity. Fed chairman Ben Bernanke鈥檚 message is simple: Whatever it takes, for as long as it takes.
This also means interest rates aren鈥檛 going up any time soon in Canada, at a moment when Flaherty is concerned that 91原创s have taken on too much household debt 鈥� on average 165 per cent of income, two-thirds of it in residential real estate. In the event of a correction in the housing sector, that could be a problem for the banks in the sense of mortgages becoming worth more than homes.
As to the cooling of the housing market, Flaherty has said: 鈥淚鈥檓 all for a soft landing.鈥� But as long as the Fed is pushing out cheap money, the Bank of Canada will be under no pressure to raise its rate above the current one per cent.
Then there are two other major domestic concerns for Flaherty: One is slowing growth in the economy, and the other is fiscal frameworks, and whether he will hit his target of balancing the budget in 2015.
On the growth side, both CIBC and Scotiabank are forecasting weak economic growth of only 1.7 per cent in 2013.
There are plenty of reasons for that, including the weakness of the recovery in the U.S., which accounts for 77 per cent of 91原创 exports.
Then there鈥檚 the discount of up to $30 per barrel on Canada鈥檚 oil shipments to the U.S., which takes more than 99 per cent of our oil and gas exports. This is what happens in monopoly situations, and the most compelling reason for Canada to diversify its oil and gas markets to Asia.
This is also why oil-rich Alberta is currently in a deficit 鈥� oil royalties aren鈥檛 hitting the forecast numbers.
Meanwhile, companies and suppliers in the oil-patch are seeing lower profits, which means they are paying less in federal taxes to Ottawa.
And lower tax receipts are one of the reasons Ottawa is missing its deficit number by $4 billion 鈥� it鈥檚 coming in at $25 billion rather than $21 billion, as forecast in the last budget.
In the name of caution, Ottawa has moved the target date for balancing the budget back to 2016 from 2015. But Flaherty maintains there鈥檚 still a strong possibility of balancing the books during the life of this Parliament 鈥� there鈥檚 a fixed election date of October 2015. That would mean achieving balance in fiscal 2015-16.
And when you look at the revised deficit projection of $1.8 billion for 2015, that figure allows for a $3-billion contingency fund, or 鈥渞isk adjustment,鈥� that may not be needed. In the event he decides not to run again in the next election, Flaherty will want a balanced budget on his watch.
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L. Ian MacDonald, a former head of public affairs at the 91原创 Embassy in Washington, is editor of Inside Policy, the magazine of the Macdonald-Laurier Institute.
