Flaherty takes hard line on spending as Ottawa feels the oil-price pinch – by Bill Curry and Shawn McCarthy (Globe and Mail – February 7, 2013)

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OTTAWA — Ottawa’s finances are taking a hit from discounted prices for Canadian oil, and Finance Minister Jim Flaherty says this will force him to hold a harder line on spending as he prepares the 2013 budget.

The Finance Minister said lower commodity prices and persistently low inflation are combining to have a negative effect on government revenues. Still, the minister insists he expects to balance the books before the 2015 election without dramatic spending cuts.

“We have to do more on the controlling our own spending side, but we don’t have to slash and burn,” Mr. Flaherty told reporters after a speech to an Ottawa business audience that outlined the focus of the 2013 budget, which is expected in the next several weeks.

Spending cuts are already scheduled to ramp up to $5.2-billion a year over the coming two years as part of a phased-in plan to scale back spending announced in the 2012 budget. The upcoming budget is not expected to include major additional spending cuts. Rather, Mr. Flaherty is signalling that Canadians shouldn’t expect much new spending.

Still, the government has faced continued challenges from Parliamentary Budget Officer Kevin Page, who says Ottawa is not being transparent about its cuts. The PBO has said Ottawa appears to be cutting front-line services in spite of Mr. Flaherty’s assurances that cuts would affect only the “back office” of the federal bureaucracy.

The gap between Alberta heavy oil and the benchmark North American crude has widened considerably in the past two years. Alberta crude, which is thicker and needs more refining, typically sold for $18 less a barrel than West Texas Intermediate, but it is now about $34 a barrel cheaper. The discount was more than $40 late last year.

Oil prices are already forcing the government of Alberta deep into the red as problems over pipelines and access to markets force Canadian oil producers to sell their product at deep discounts, leading to lower profits and, in turn, lower tax revenue for the province and Ottawa.

Last week, Alberta Premier Alison Redford said the province’s oil and gas revenues would drop by $6-billion from earlier budget projections. While Ottawa does not collect direct royalties as the provinces do, the declining profits would reduce federal corporate income taxes. In 2011, Ottawa collected $1.2-billion in taxes from the industry, according to Statistics Canada.

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