The federal Liberal government is projecting a deficit of at least $18.4 billion next year, nearly five times its $3.9-billion projection just three months ago, it was revealed today.
That means the shortfall could well exceed $20 billion once a number of big-ticket Liberal campaign promises are factored in.
The estimates released Monday do not include billions of dollars in Liberal spending commitments that are expected in the upcoming federal budget, such as infrastructure investments.
Canadian Finance Minister Morneau announced that the Federal budget will be tabled March 22nd, and provided an updated look at the fiscal situation. Ottawa is now looking at an $18.4 billion deficit for the upcoming fiscal year (FY16/17), but that could reach upwards of $30 billion on budget day. Note that this includes an even larger contingency than Ottawa was using in past projections, of roughly $6 billion per year (previously $3 billion). Also, we’ve assumed additional stimulus of roughly $10 billion in year 1, as in the election platform, will make its way into the fiscal year starting April 1st. The updated outlook now also points to a deficit of roughly $26 billion in FY17/18, but the underlying shortfall in each of the two upcoming years could be $6 billion smaller if the economy performs as expected, and that is allowed to flow to the bottom line. We fully agree that a moderate dose of stimulus is an entirely appropriate response to current economic realities, but we would counsel caution in minding the dosage, for two distinct reasons: 1) The growth restraints on Canada look to be structural in nature (a reset lower on commodity prices), and not a short-term cyclical phenomena that can be countered with a quick fiscal boost, and 2) an overly aggressive fiscal boost could do lasting damage to Canada’s finances, casting doubt on the country’s hard-won triple-A credit rating.
Finance Minister Morneau’ s updated picture of the economic backdrop heading into this year’s budget isn’t pretty, but that’s not news to anyone who has followed the deterioration in private sector forecasts. The 2016 real GDP forecast sits at 1.4%, nearly in line with our projection, but that’s down from 2% assumed in the November 2015 mid-year update, and nominal GDP has seen a deterioration due to the lower track for oil. Finance Minister Morneau’s updated picture of the economic backdrop heading into this year’s budget isn’t pretty The result is that before applying new measures in the budget, the status-quo fiscal outlook would be for a deficit of $18.4 bn, compared with a November estimate of $3.9 bn (and a surplus of $2.7 bn assumed for the coming year in the spring 2015 Budget). Note that the Liberal’s campaign pledge to run a $10 bn deficit was keyed off of that $2.7 bn surplus estimate for the status quo. Since that base case has deteriorated by a total of $21 bn, keeping the planned stimulus in place would now mean a deficit of roughly $30 bn. That’s still only 1 ½% of GDP, hardly a blow-up. The only question is whether the modest dose of stimulus pledged in the campaign (roughly a half-percent of GDP) is enough to counter the drag on the economy from low commodity prices.
With Morneau stating that it’s “difficult” to balance the budget by 2019-2020, we expect an extended period of large deficits. The main driver of the budget is a weaker profile for growth, with GDP growth slashed to 1.4% this year from 2.0% assumed previously. The deficit shortfall includes the impact of new tax measures announced in December, although infrastructure stimulus impacts are not factored in. New infrastructure spending, which could total $5B in 2016, could trigger an even larger deficit. As we have argued, the government has room for roughly $30B in deficit spending this year if they wish to hold the net-debt-to-GDP ratio constant. Thus, although the government has less room for additional stimulus measures, given the weaker deficit starting point, we think there is still some room to surprise to the upside relative to campaign promises. For Bank of Canada policy, the implication is clear: a flexible, stimulus-ready Federal government is taking the pressure off of monetary policy as the sole driver of growth. Thus, we reiterate our view that the BoC will stay on hold in 2016 despite weak economic growth. We see no rate hikes or cuts over our forecast horizon.