Economists at TD Bank have updated their budgetary outlook for Canada in light of the Finance department’s recent economic update. TD Economics suggests that the government’s hands are tied on new spending and tax relief if it intends to avoid a deficit.

The general trend that as seen by TD Economics is not affected by the new numbers — it still sees large surpluses now, narrowing to a slight deficit by the mid-point of the decade. TD says its update differs from that of the federal government in that it expects the surplus for the latest fiscal year will be higher than the $15 billion estimated by Finance.

TD Economics has updated each of the major components of federal finances rather than adjusting only the bottom line. It has extended out the projection to fiscal 2006-07, and it has based its fiscal projections on its own forecast for economic activity, rather than the average of the private sector forecasts.

The final surplus for fiscal 2000-01 is estimated at $16.5 billion. All of this will go towards debt retirement. The surpluses steadily erode from that point due to the phased-in implementation of tax relief and increases in program spending.

By fiscal 2004-05 the underlying surplus is down to a projected $5.5 billion. That does not cover the combination of a $3-billion contingency reserve and $3-billion of additional economic prudence. As such, there is a slight planning deficit. “The planning surpluses for this year, next year and the following year suggest that the federal government could introduce additional measures — either more tax relief or more spending. However, in keeping with past budgetary practices, they could not at this time announce any new measures that had a cost extending out to fiscal 2004-05,” says TD Economics.

It suggests that it is unlikely that the government could bring new initiatives that wouldn’t impact 2004-2005. “In practical terms, the government is really constrained from taking any new measures even in the near term. It is very rare that any initiative, even if announced as a short-term measure, doesn’t ultimately get extended. And temporary tax relief is not what the economy needs. In order to improve the incentives to work, save and invest, tax relief must be announced as being permanent.”