Flaherty says there’s no doubt deficit will be erased by 2015

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The Conservative government is setting the stage for a 2015 election year that will announce a return to balanced books and the likely launch of income splitting for parents.

Finance Minister Jim Flaherty is using his strongest language to date in promising he will hit his 2015 target for a return to a budget surplus. He said this can be accomplished even though Ottawa is facing some large and unexpected bills in response to this summer's Alberta floods and the Lac-Mégantic, Que., rail disaster.

"We're going to balance the budget without doubt in 2015," Mr. Flaherty told reporters on Wednesday outside a policy retreat. "We will do what it takes to balance the budget in 2015-16, not for the sake of balancing the budget, but to put Canada in a position of strength so that we can react adequately to any sort of economic pressure that comes from outside our country."

The minister also placed the controversial proposal of income splitting, which was first promised by the Conservatives during the 2011 election campaign, back on the political agenda.

The pledge is a costly one, with an estimated price tag of $2.5-billion a year. The promise was contingent on a balanced budget and made at a time when the government thought the deficit would be easier to erase. Since then, it has rarely been mentioned other than by outside policy groups that have been debating the proposal's merits.

Mr. Flaherty was asked specifically whether he would offer income splitting in the 2015-16 fiscal year. "I would hope to," he said, noting that it will depend on how the economy performs. "We'll be prudent and, as you know, we fulfill our campaign commitments and we're committed to them."

That last line matches this week's political rhetoric from Prime Minister Stephen Harper, who is on his annual northern tour as the government prepares a Speech from the Throne with an eye to the next election campaign. With little money available for new spending, the government's political message of late appears to focus on delivering on past promises. Balancing the books is shaping up as the most important promise to keep.

But certainty is in short supply when it comes to politics and economics. The economy – either at home or abroad – could fail to meet expectations. There could be natural disasters or other emergencies that could involve an expensive military deployment.

Toronto-Dominion Bank economist Sonya Gulati, who tracks Ottawa's deficit numbers, said the government's current forecast for a small surplus in 2015-16 could be knocked off track by unknown events.

Mr. Flaherty has the option of deeper spending cuts to hit his target, but Ms. Gulati said that might not be the best way to respond if economic growth comes in lower than expected. "He may have to make some really hard choices," she said. "I don't necessarily think that he can say zero probability of missing [the target], just because of all of the economic risks that are out there."

Ms. Gulati said TD is currently updating its forecasts, but that growth is generally in line with the assumptions that underpin the 2013 budget.

At the time of the March, 2013, budget, the 2012-13 deficit was estimated at $25.9-billion. The deficit for the current fiscal year was estimated at $18.7-billion and then $6.6-billion for 2014-15. The March budget forecast a surplus of $800-million in 2015-16, the year Mr. Flaherty now says he will definitely post a surplus.

The 2011 Conservative election platform promised to give two-income couples with children under 18 the option to share up to $50,000 of their household income for federal income-tax purposes. The pledge is billed as providing fairness to families in which one of the adults earns more than the other. Supporters say it will benefit families that wish to have one adult stay home or work part-time.

However, critics, including economists with the C.D. Howe Institute, say the tax cut would largely benefit high-income Canadians and would discourage married women, who are more likely to stay homewith their children, from working returning to work because the lower-earning spouse would face a higher tax rate.