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Flaherty to deliver economic update: deficit off-target

OTTAWA — Federal Finance Minister Jim Flaherty is expected to release his fall economic update on Tuesday in Calgary —and he'll likely confirm the government won't meet its 2014-15 target for eliminating the deficit.
The Conservative government, Bank of Canada and parliamentary budget officer have all downgraded their economic projections over the past few weeks, and Tuesday's fall update will reflect the sluggish forecasts.
Flaherty is expected to deliver the refreshed fiscal outlook during a speech to the Calgary Chamber of Commerce, and it's believed he'll confirm the government won't be able to meet its target for balancing the books.
The finance minister announced two weeks ago that, based on the average projections of 15 private-sector economists he regularly consults, the government was trimming the country's economic forecast for the next few years.
Flaherty predicted Canada won't sink back into recession unless it experiences a "dramatic shock" from the European debt crisis that continues to threaten the global economy.
But at the time, he hinted the government would not be able to balance the books by its target, and instead would look to eliminate the projected $32.3-billion deficit over the "medium term."
Tuesday's economic statement likely will update the government's revenue and spending projections, including whether the forecast deficit for this year has changed.
The Tories are in the midst of an ongoing strategic operating review that is searching for $4 billion in annual cuts.
Flaherty has a number of tools at his disposal, including: slowing the spending cuts; developing a broader jobs plan such as opposition parties are demanding; or delaying planned corporate tax cuts.
Another option, which Postmedia News has learned the government will take advantage of, is to increase employment insurance premium rates.
However, the increase will not be as much as some had anticipated.
The government is reducing the EI premium increase from a planned 10 cents for employees to five cents, and for employers it is cutting the increase from 14 cents to seven. Fifty per cent cuts in expected increases for next year.
The general corporate income tax rate is slated to fall to 15 per cent on Jan. 1, 2012 from the current 16.5 per cent.
Political observers and economists aren't expecting dramatic changes from Flaherty's economic update, and aren't certain now is the time to make any bold moves.
"The level of uncertainty is just too high to leap dramatically in one direction or another. I think we'll see a fair degree of caution," predicted Roger Gibbins, president of the Canada West Foundation, a Calgary-based think-tank.
"The update will sort of signal caution going into the spring budget without committing the government to anything dramatic in terms of either cutbacks or stimulus."
The government is wise to protract its timeline for balancing the books if the economic signs demand it, Gibbins added, saying now is not the time for the Conservatives to be dogmatic in their deficit fight.
"Sometimes promises deserve to be broken in light of changing circumstances," he said.
The Conservative government now forecasts real GDP growth in Canada at 2.2 per cent in 2011— down significantly from the 2.9 per cent projected in March.
The economic outlook for 2012 is also noticeably weaker than initially forecast, with real growth in gross domestic product now expected at 2.1 per cent next year, compared to 2.8 per cent projected in March.
The level of economic growth in 2013 also has been trimmed, down to 2.5 per cent from 2.7 per cent projected earlier this year.
"We need to maintain the fiscal track to get back to balanced budgets. So we intend to stay on course to get to a balanced budget in the medium term," the minister said two weeks ago, upon delivering the updated GDP numbers.
The government has vowed to be "flexible and pragmatic" to maintain economic growth in Canada, but has continued to resist NDP calls for potentially billions of dollars in stimulus spending to spur job growth in Canada.
Last week, Canada's parliamentary budget officer predicted slower economic growth and higher unemployment in Canada than the Harper government, saying the country's books probably won't be balanced until 2016-17 at the earliest.
The slower-than-expected growth is likely to increase unemployment to eight per cent in 2012 and 2013 (compared to 7.4 per cent this year), which translates into 100,000 more unemployed Canadians by next year, according to the parliamentary budget officer.
It will also generate smaller federal tax revenues and larger budget deficits — making it almost impossible for the government to meet its target of balancing the books by 2014-15, the report said.
Flaherty, however, disagreed with the assessment, saying last week, that Canada is well on its way to eliminating the deficit.
"We are on track, we are seeing modest growth in Canada this year. This is relatively good," Flaherty said.
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