Canada forecasts faster growth, bigger surplus

Aug 24, 2007 - Canada's economy is growing faster than expected this year and this should deliver a larger federal budget surplus than originally forecast, the Finance Department said on Friday.

"The budgetary surplus for 2007-08 is now expected to come in higher than the budget 2007 projection of C$3 billion ($2.9 billion)," the department said in its quarterly update of the fiscal outlook.

"The improved outlook stems from stronger-than-expected economic performance, as well as higher-than-anticipated revenues as suggested by year-to-date financial results. Program expenses are expected to be largely unchanged from the budget 2007 outlook."

It said the budget surplus in June was C$2.85 billion, up from C$2.26 billion in June 2006. The April to June surplus was C$6.36 billion, up from C$5.89 billion in the same period last year and more than twice the originally forecast surplus for the whole fiscal year.

It did not say how much more than C$3 billion it thought this year's surplus would be, noting that a comprehensive update would come in the autumn Economic and Fiscal Update.

Canada is the only country in the Group of Seven leading industrialized nations to be running budget surpluses.

The department released an updated economic forecast, which it takes from private-sector economists, to show real economic growth this year of 2.5 percent, up from the 2.3 percent forecast in the March budget. But the economists cut the forecast for 2008 to 2.7 percent from 2.9 percent.

The economists significantly boosted their projections for GDP inflation -- used to determine how much of nominal growth in gross domestic product is due to higher prices. For 2007 they saw GDP inflation of 2.7 percent instead of 1.5 percent, and for 2008 they boosted their forecast to 2.2 percent from 2.0 percent.

Consequently, nominal GDP growth, which has a strong correlation with tax revenues, has been revised up to 5.2 percent for 2007 from 3.9 percent. The figure for 2008 remains unchanged at 5.0 percent.

This would leave nominal GDP about C$20 billion higher in both 2007 and 2008 than projected in the March budget.

In its figures for what has already been spent in the first three months of the fiscal year, which started in April, the government showed that total spending had risen by 6.7 percent from the same period in 2006 to C$54.00 billion.

Flaherty has promised to limit spending to the rate of nominal growth in GDP on average over the mandate of the Conservative government, but he spent at a higher rate than that in the government's first year in office.

($1=$1.05 Canadian)