UPDATE 1-Canada faces major currency risks – budget officer

* Budget office sees major currency risks to economy

* Predicts structural budget deficit in 2015-16

* Flaherty disagrees with report’s findings
(Adds finance minister’s comments)

OTTAWA, Nov 3 (BestGrowthStock) – The Canadian dollar’s recent rise
against the U.S. dollar is out of line with commodity prices
and could therefore curb economic growth over the next two
years, the country’s independent budget office said on
Wednesday.

In a report assessing Canada’s economic and fiscal outlook,
the Parliamentary Budget Office (PBO) identified two major
currency issues that could threaten the economy.

The first is global tension arising from steps by some
countries to keep their currencies artificially weak in order
to export their way back to growth, and talk of retaliatory
trade actions.

The second is the strong rebound in the Canadian dollar
since early 2009, which the report says has “significantly
outpaced the movement in commodity prices”.

“Recent and projected movements in the exchange rate and
commodity prices, based on the current private sector outlook,
are estimated to restrain growth significantly over the next
two years,” it said.

The Canadian dollar briefly rose past parity with its U.S.
counterpart last month for the first time since April, a rally
that was largely attributed to a steep sell-off in the
greenback on expectations of further monetary easing by the
U.S. Federal Reserve.

The Canadian currency is expected to gain momentum and
trade around parity for much of the next year, a Reuters poll
showed on Wednesday, although forecasters said that strength
would reflect fundamentals. [ID:nN03102293]

The report also forecasts that Canada will still have a
structural budget deficit in 2015-16, contradicting the
government’s view the books will be balanced by then.

The head of the budget office, Kevin Page, has frequently
clashed with Finance Minister Jim Flaherty over the fiscal
outlook. He told Reuters last month that Canada’s plan to
balance its budget by the middle of the decade was weak and
fails to properly consider risks such as soft growth and an
aging population. [ID:nN21238459]

While this latest report provides new figures based on the
view that expenditures will be higher than the government
predicts, the message is the same: Ottawa is being overly
optimistic.

“PBO’s estimate of the structural deficit does not mean
that the government’s budget will not return to balance.
Rather, it suggests that policy actions to increase revenues
and/or reduce spending relative to their projected paths would
be required to ensure that the budget is balanced once the
economy returns to its potential.”

The PBO sees a budget deficit of C$40 billion ($39.6
billion), or 2.5 percent of gross domestic product, in 2010-11.
It expects that shortfall to shrink to C$11 billion by 2015-16,
the year the government says it will return to a surplus of
C$2.6 billion. [ID:nN12187547]

Overall federal government debt will jump to C$658.1
billion, or 32.4 percent of GDP, in 2015-16 as a result,
compared with the 2007 level of C$457.6 billion.

Finance Minister Jim Flaherty disagreed with the report,
and suggested Page’s is a minority opinion. Flaherty cited
private-sector economists consulted by his staff and an IMF
mission to Canada that broadly supported the government’s
outlook.

“He should take it up with the 15 other economists in
Canada,” Flaherty told reporters.

“He also should take it up with the IMF which last week,
just last week, sent a mission to Canada to analyze how we’re
doing and said we’re doing very well and that we’re on track
and our budget’s assessments and projections are accurate, well
founded and based on conservative principles,” he said.

($1=$1.01 Canadian)
(Reporting by Louise Egan; editing by Peter Galloway)

UPDATE 1-Canada faces major currency risks – budget officer