Low Oil Prices threaten "OTTAWA'S CONTINGENCY RESERVE

CANADA--Experts weighing the threat of low oil prices to the federal government's bottom line are asking themselves a followup question: what's to become of Ottawa's contingency reserve?

Many budget watchers believe cheaper crude will challenge the Conservative government to keep its longheld promise to pull Canada out of the red in 2015-16.

 

And the longer oil stays low, the more likely the federal government will have to dip into the country's $3-billion rainy day fund, which was set aside for unforeseen events.

The Conservative government has repeatedly maintained it will achieve a balanced budget, despite low oil prices that indirectly cut into federal revenues. With an election date set for October, the promise will be central to the Conservatives' electoral fortunes.

"I think it really adds to the drama of what's expected to happen in 2015 with an election coming up," said Randall Bartlett, a senior economist with TD Economics.

he government's latest estimate for the 2015-16 election-T year budget, announced in November, predicted a $1.6-billion surplus.

That projection had shrunk from $6.4 billion nine months earlier due to new government tax-relief and spending measures, which were followed by the sharp, late-2014 slide in crude prices.

The Finance Department accounted for some of the oil-price drop in its November fiscal and economic update, with Finance Minister Joe Oliver warning it could drain billions of dollars from the federal piggy bank.

Oliver's spokeswoman said the government will provide an update on the fiscal impact of oil prices in the coming federal budget, but she noted the cushion is available to address unanticipated circumstances. The government allocates whatever remains of the contingency reserve at the end of the fiscal year to pay down the federal debt.

"We have a contingency built in for any surprises," said Melissa Lantsman, who added the effect of oil prices could qualify as one of those unexpected scenarios.

In fact, the world is full of economic surprises these days, so much so that last week BMO dropped its 2015 projection for the average price of oil to $56 per barrel.

Doug Porter, chief economist for BMO Capital Markets, believes at least some of the government contingency will be used, leaving only a "very small surplus."

The parliamentary budget office has also been busy crunching numbers to determine the potential fiscal fallout of cheaper crude, though the final figures have yet to be finalized.

Mostafa Askari, the assistant parliamentary budget officer, said from an economic perspective it makes little difference whether the country runs a couple of billion dollars into surplus or deficit.

"I know for them it's relevant politically," Askari said. "But from our point of view, as far as the economy is concerned and the future fiscal prospects are concerned, it's irrelevant. "The federal government has a sustainable fiscal situation right now."