* Sees structural budget deficit gone in 2013-14
* Says budget cuts will increase economy’s output gap
* Sees lower growth than forecast by Bank of Canada, budget
* Expects interest rates to be on hold till Q4 2014
OTTAWA, April 25 (Reuters) – Canadian government spending
cuts will delay economic recovery and prompt the Bank of Canada
to keep interest rates on hold at current low levels until late
2014, the parliamentary budget watchdog said on Wednesday.
In its semi-annual report to Parliament, the office of
Parliamentary Budget Officer (PBO) Kevin Page also said that the
spending cuts would eliminate the government’s structural budget
deficit by 2013-14.
A structural deficit is that portion of a deficit that is
not the result of changes in the economic cycle, and that exists
even when the economy is performing at its peak.
Last month’s federal budget pledged to cut discretionary
spending by 6.9 percent by 2014-15. The PBO
report said this would delay the economy’s return to operating
at its full potential.
“PBO expects that restraint and reductions in government
spending on programs in Canada will act as a drag on economic
growth and job creation, pushing the economy further away from
its potential GDP (gross domestic product) and delaying the
economic recovery,” the report said.
It forecast real economic growth of 1.9 percent this year
and 1.6 percent in 2013. By comparison, the Bank of Canada sees
growth of 2.4 percent this year and next, and the government’s
budget sees growth of 2.1 percent in 2012 and 2.4 percent in
2013.
The budget office estimated that the economy is running at
1.9 percent below its potential. The Bank of Canada estimates it
was roughly half a percent below capacity in the first quarter
and that the gap should vanish by the first half of 2013.
“Owing to the tepid pace of economic recovery and given the
firm anchoring of inflation expectations, PBO expects the Bank
of Canada to maintain its policy interest rate at 1 percent
until the fourth quarter of 2014,” the PBO report said.
The central bank held its key overnight rate at 1 percent
last week but said that in light of the reduced slack of the
economy and firmer underlying inflation, “some modest withdrawal
of… monetary policy stimulus may become
appropriate”.
The PBO report forecast federal deficits of C$20.4 billon
($20.6 billion) in 2012-13, C$13.4 billion in 2013-14 and C$4.8
billion in 2014-15. It sees surpluses of C$2.4 billion in
2015-16 and C$10.8 billion in 2016-17.
