If the price of oil averages US$48 a barrel this year, Canada will end up with a small deficit in 2015-16, even with the use of a contingency fund set aside for unexpected events, Canada's budget watchdog said on Tuesday.
wThe government has forecast a surplus for the fiscal year ending 31 March 2016.
The fiscal impact of the recent plunge in the price of oil, a major export for Canada, will depend on how long prices stay low and the cause of the declines, a report from the Office of the Parliamentary Budget Officer (PBO) said.
The report laid out two scenarios: the first in which the price of U.S. crude oil averages US$48 a barrel in 2015, and the second with oil at US$51 a barrel, rising to an average of US$60 in 2016. Both projections were slightly above current market prices, with crude trading around $45 a barrel on Tuesday.
Under the first scenario, the lower oil price would more than exhaust the CAN$3 billion (US$2.4 billion) contingency fund for 2015-16 and result in a small budget deficit of CAN$400 million. In the second scenario, a surplus of CAN$700 million would be managed, including the contingency fund.
In its fiscal update last November, the government had forecast a surplus of CAN$1.9 billion for 2015-16, plus the CAN$3 billion contingency. That had been based on oil prices remaining at US$81 a barrel.
Finance Minister Joe Oliver will not unveil the budget until at least April this year, later than usual due to market volatility.
The Bank of Canada surprised markets with its decision to cut interest rates last week, citing a threat to economic growth and its inflation targets from the slide in oil prices. Oil has shed more than 60% since June.
For the current fiscal year ending 31 March, the PBO forecast the government will run a budget deficit of CAN$1.2 billion, taking the contingency fund into account and based on an oil price of US$93 in 2014.
The government has projected a deficit of CAN$2.9 billion without the contingency fund, giving it an underlying surplus of CAN$100 million for 2014-15.
Adapted from press release by Joe Green