The Conservative government is warning for the first time that falling oil prices could trigger new spending cuts in order to deliver on a promised balanced budget.

On the heels of the surprise decision to delay the federal budget until at least April, the government is putting Canadians on notice that it is prepared to cut spending further rather than abandon its goal of balancing the books.

Federal Employment Minister Jason Kenney is also pledging that Ottawa can hit its target without dipping into a $3-billion contingency fund, a comment that is at odds with recent statements from Finance Minister Joe Oliver, as well as analysis from several private-sector economists.

The messaging from the government is shifting quickly in the face of growing signs that current, dramatically lower oil prices will be around for some time. The Bank of Canada will release its quarterly Monetary Policy Report on Wednesday, which is expected to expand on recent warnings that prices could go lower, or remain low, “for a significant period.”

In a series of interviews broadcast over the weekend, Mr. Kenney said balancing the books has important symbolic value and that “it may take some additional spending restraint” in order for the government to deliver on its promise.

“We’ll have to certainly look at potentially continued spending restraint. For example, we’ve had an operating spending freeze. The Finance Minister may have to look at extending that,” Mr. Kenney told CTV’s Question Period in an interview broadcast Sunday.

In a separate interview with Global’s The West Block, Mr. Kenney ruled out using the annual $3-billion contingency fund to achieve balance: “We won’t be using a contingency fund. A contingency fund is there for unforeseen circumstances like natural disasters.”

If a government is in surplus and has not spent the contingency, that money goes toward paying down the national debt. However, Mr. Oliver suggested last week that the government was not planning to do that and would instead “bring the surplus down to zero” in order to provide benefits to Canadians.

The government says it is taking a few extra weeks to release a budget in order to get a better understanding of the current changes in the economy. The price of oil has dropped by more than half since June, a development that will mean billions less in tax revenue for Ottawa than had been previously expected.

In a prebudget letter to Mr. Oliver, the NDP urges the Finance Minister not to delay the budget and to instead scrap the recent tax cut that allows parents with children under 18 to split their income for tax purposes. The NDP says Ottawa should cut spending on advertising, the Senate and corporate subsidies.

The letter calls for more spending on health care, child care and pensions and the creation of a credit for small businesses that make new hires.

The 2014 federal budget reintroduced a two-year freeze on departmental operating budgets that runs through the 2015-16 fiscal year, which is when the Conservatives are promising a return to balance. The 2014 budget said this freeze would save the government $550-million in 2014-15 and $1.1-billion in 2015-16. Mr. Kenney did not explain how extending the freeze might help the government achieve its balanced-budget promise.

“They spent the surplus before they had it and now they’re scrambling to figure out how to make one plus one equal three,” said NDP finance critic Nathan Cullen.

Economists say it makes no practical difference whether Ottawa posts a small surplus or a small deficit, given that federal finances are sound overall in terms of debt levels and long-term spending trends. But Mr. Kenney said balancing the books remains an important goal.

“It’s a commitment we made to Canadians in the last election,” he told CTV. “It’s important that, when possible, we no longer go back and borrow money to pay for government spending.”

OTTAWA — The Globe and Mail
Published Sunday, Jan. 18 2015, 11:43 AM EST
Last updated Sunday, Jan. 18 2015, 8:03 PM EST