The Canadian Press

OTTAWA — Ottawa's battle to rein in record deficits could be won a full year ahead of schedule, the Conference Board of Canada says in a new analysis of how the economic recovery is impacting government finances.

The Ottawa-based think-tank's look at the nature of the economic rebound shows that Ottawa stands to eliminate the deficit -- and actually post a $5-billion surplus -- within five years.

That's at least a year ahead of ahead of the plan laid out by Finance Minister Jim Flaherty in the March budget, which still saw a $1.8-billion deficit in the final year of the projection period, 2014-2015.

Flaherty's projections received wide criticism as overly optimistic at the time and Parliamentary Budget Officer Kevin Page expressed doubt that Ottawa would ever get back to balance without raising taxes or cutting spending.

But Conference Board economists Glen Hodgson and Matthew Stewart said much has changed since March, particularly expectations for nominal growth -- different from the more commonly reported real gross domestic product in that it measures the value of output rather than the amount.

The key point is that government revenues are much more directly tied to nominal GDP by way of higher corporate tax and income tax receipts.

"Here's the good news for the federal government," they wrote. "The Conference Board forecasts nominal GDP growth in 2010 to exceed significantly (the) consensus view used in the federal budget."

Stewart says while real GDP growth has only been modestly better than the budget's expectations, nominal GDP has exploded thanks to a quick rebound in global commodity prices that has brought additional wealth into the country.

The budget had expected nominal GDP to grow at a healthy 4.9 per cent this year, when in fact it will likely grow by 7.2 per cent.

"The starting point right away is already going to add about $5 billion to revenues, so even if growth (going forward) is slower, it's not hard to end up in a much better situation a couple of years out," he explained.

The difference is dramatic. This year's deficit will likely come in at $44 billion rather than the $49.2 billion estimated in the budget. Over the next four years, the government's fiscal picture will be an accumulated $27.4 billion to the good of what it projected.

Already, data is pouring in that the quicker-than-expected rebound has dramatically improved the treasury.

Finance Department figures show last year's deficit likely totalled about $47 billion, well below the budget's $53.8-billion estimate. And in the first two months of this year Ottawa is already $3 billion better off than it was at the same point in 2009.

Stewart cautioned the estimates assume Ottawa will stick to its spending plans, including withdrawal of stimulus after this year.

But he says that Ottawa can achieve its goals by reducing the size of the public service by 11,000 over the next three years.

Scotiabank economist Mary Webb, who specializes in fiscal forecasting, says the Conference Board numbers are realistic provided there isn't a sharp global downturn that depresses commodity prices. Barring that scenario, Canada is poised to come out of the recession's aftermath in a strong position, she says.

"Canada entered this downturn with a fiscal advantage and a projection like this underlines Canada's fiscal advantage coming out of the downturn," she said.

"That's exactly how Canada wants to come out of this, having accomplished an earlier balancing than other countries and with other measures like the corporate tax relief intact."

Some provinces have also reported better-than-expected results for the just past fiscal year, likely as a result of the economy's bouncy recovery in the fourth quarter of 2009 and first quarter of 2010, when growth sprang forward by 4.9 per cent and 6.1 per cent respectively.

Following upbeat updates from British Columbia, Alberta and Saskatchewan, Nova Scotia reported Thursday that its just completed year's deficit will be $242 million, not the $592-million shortfall originally expected.

Still, the Conference Board believes some provinces, particularly Ontario and Quebec, will be find it much harder to balance their books in the foreseeable future.

While provincial revenues are also growing, provinces are saddled with ballooning health costs rising at about seven per cent -- faster than revenues -- and that will only worsen as the population ages, Stewart explains.

The think-tank estimated that Ontario is already in a structural deficit and will require significant reforms to control health costs in order to return to balance.