Ottawa awash in surplus cash

STEVEN CHASE AND HEATHER SCOFFIELD

From Wednesday's Globe and Mail

OTTAWA and NIAGARA-ON-THE-LAKE, ONT. — Ottawa is running a $6.7-billion budget surplus five months into the fiscal year, $2-billion ahead of where it stood one year ago.

This poses a political dilemma for Ottawa, but also appears to give Finance Minister Jim Flaherty more spending room to address provincial cries about a fiscal imbalance between Ottawa and the provinces and to deliver tax cuts.

However, it's also potentially embarrassing for the Conservative Party, which vowed to end the former Liberal government's practice of lowballing surplus estimates.

That's because the Tories forecast a surplus of only $3.6-billion for this fiscal year.

Yet the federal Finance Department's monthly monitor says that as of the end of August -- only five months into this fiscal year -- the budget surplus had hit $6.7-billion. That's significantly better than the $4.8-billion surplus recorded in the same April-to-August period last year.

Last year, Ottawa racked up a $13.2-billion surplus, and while this year might appear on track for another such windfall, the Finance Department yesterday cautioned against breaking out champagne.

"The results to date are not representative of results expected for the fiscal year as a whole," Finance said, because they don't yet reflect the full impact of Budget 2006 measures.

Still, the fiscal outlook is somewhat rosier. Despite its trademark caution, Finance already acknowledged two months ago that this year's surplus is "currently expected to somewhat exceed" projections.

So far, in the first five months, Ottawa's revenue is already up $5.2-billion, or 6 per cent, from the same period last year.

The main reason, the Finance Department said, is that it has collected significantly more tax revenue so far than it did during the same April-to-August period last year. And this is due to economic good fortune.

Personal income tax revenue is up nearly 11 per cent from a year ago, a development that Finance said reflects "solid growth in employment and wages and salaries."

Plus, corporate income tax revenue is also up about 11 per cent from last year, a situation that is partly due to "ongoing gains in corporate profitability this year," the department said.

While a growing surplus is always good news for governments, it's nevertheless politically awkward for the Tories, who for years accused the former Liberal government of lowballing budget surplus estimates and then spending windfall surpluses at year end.

"It certainly does not fit with the notion that the days of large unexpected surpluses are over," Liberal finance critic John McCallum said.

Finance Minister Jim Flaherty denied that the country's books were out of whack, but at the same time took credit for the windfall.

"Two good things are happening, I think. One is, that our budget predictions are on track and we're doing okay there," he told reporters after a speech in Niagara-on-the-Lake, Ont. "Secondly, we're controlling spending, and that hasn't happened in Ottawa in quite a while. It makes a difference."

He said he would revise the budget projections in the government's economic update this fall, and give some details about where any extra money might be spent.

"We're on track and we're doing well on the revenue side, and I can tell you on the spending side we're controlling spending effectively."

Economists caution that Ottawa could still experience a reversal of fortune in the rest of the fiscal year as the U.S. economic slowdown hits Canada and the impact of the one-percentage-point goods and services tax cut affects revenue.

Toronto-Dominion Bank chief economist Don Drummond said he is surprised by the powerful growth in personal income tax revenue and doesn't think this will continue for the entire fiscal year. "It's extraordinarily odd that personal income taxes would be growing at double the rate of the economy."

John Williamson, federal director of the Canadian Taxpayers Federation, said the real problem is that Canadians are still overtaxed.

Regardless of how much of a surplus Ottawa reaps, demands are heavy, particularly for money to fulfill the Tories' pledge to restore the fiscal imbalance. There are calls for as much as $2-billion in additional postsecondary and skills-training money and $1-billion to enrich equalization payments. The Bloc Québécois is demanding $3.9-billion more in annual payouts for Quebec or it will vote against the Conservative budget, a move that could help defeat the Stephen Harper government.

Mr. Flaherty's fall update, expected by early-to-mid November, also plans to lay out a pro-growth economic agenda that goes beyond the five-priority Tory election platform to address broader economic concerns such as clogged highways and border crossings, skill shortages and Canada's high tax burden.