Liberals inherit deficit that could jeopardize budget goals: study

Share

Canada's Parliamentary Budget Office says the new Liberal government will inherit a string of projected deficits that will make it "extremely difficult" for it to meet its target for balancing the books.

Tuesday's report shows Ottawa's finances have worsened since April's federal budget, which is not a complete surprise in light of the fact that Canada experienced a technical recession in the first half of the year.

The Conservative government's April budget assumed the economy would grow by 2 per cent this year. The PBO now expects growth of just 1.1 per cent, which is in line with many private-sector forecasters and the Bank of Canada.

However, the forecast from Parliament's financial watchdog suggests the landscape over the coming years is also worse than what the Liberal platform had assumed, a development that could force the government to adjust its plans.

"Based on our status quo projection and their plan that was articulated in their platform, it would be extremely difficult for [the Liberals] to meet their balanced budget target in 2019-20," Mostafa Askari, the Assistant PBO, said in an interview.

Tuesday's PBO report updated the federal government's April budget forecasts in light of the more recent developments in the economy, which has largely underperformed expectations. It essentially presents the financial baseline the Liberal government inherits before making any of its promised spending and tax changes.

The Liberals had argued during the campaign that the Conservative numbers were out of date. The party relied instead on a July report from the Bank of Canada. But the PBO report indicates growth will be lower than that over the coming years.

Weaker economic growth ultimately leads to less tax revenue for the federal government.

Federal Finance Minister Bill Morneau told reporters Tuesday that it is too soon to say whether the Liberals will need to adjust their fiscal plans. He said he is hoping to release a fiscal update before the end of the year.

Fall updates are usually a simple recalculation of revenue and expenses based on the latest economic data; however, they are sometimes used as a form of "mini-budget" that includes new policy measures.

"It's way premature to go after decisions on whether we would re-think our platform commitments," said Mr. Morneau, who will be attending next week's G20 summit in Antalya, Turkey with Prime Minister Justin Trudeau. "We believe that what we put forward in our platform were the right approaches to dealing with what we see as tepid growth and this [report] just reinforces the need for those sorts of commitments for Canadians."

John McCallum, the Minister of Immigration, Refugees and Citizenship said the PBO's numbers underscore the importance of the Liberal plan to boost spending on infrastructure.

Mr. McCallum was involved in crafting the Liberal fiscal plan and he reiterated the party's pledge to balance the books by 2019-20.

"We are sticking to that commitment," he said.

A back-of-the-envelope calculation by Stephen Tapp, a former PBO economist who is now research director of the Institute for Research on Public Policy, said combining the PBO numbers and the Liberal fiscal plan would produce a deficit of more than $11-billion in 2019-20, the year a balanced budget is promised.

Mr. Tapp's calculation did not attempt to estimate the positive impact on growth that could occur through infrastructure spending. Some private-sector economists have said Liberal policies could generate as much as half a percentage point in additional growth per year.

Mr. Askari of the PBO said new spending on infrastructure would boost economic growth, but would not likely generate enough revenue to balance the books.

"What you get out of that [infrastructure spending] on the fiscal side is not going to be sufficient to offset the expected deficit," he said.

The PBO report states that federal finances are on track for a small surplus this year, but that is primarily due to the one-time sale of General Motors shares, which raised $2.1-billion.

"This will not be an ongoing source of revenue," the report states.

The PBO's status quo forecast projects a $3-billion deficit in 2016-17. Deficits in the next four years are forecast to land between $4-billion and $5-billion. These figures do not include money set aside for contingencies.

The Conservative government's April budget had set aside $1-billion per year for contingencies through to 2017-18, then $2-billion in 2018-19 and $3-billion in 2019-20.

Including those contingencies, the Conservative government's budget forecasted small surpluses of $1.4-billion this year, $1.7-billion next year, $2.6-billion in 2017-18, $2.6-billion in 2018-19 and $4.8-billion in 2019-20. But those numbers were based on projections for economic growth and oil prices that have since proved to be overly optimistic.

NDP MP Guy Caron called on the Liberals to release an update before the end of the year in order to explain what the new figures will mean for the government's spending plans. Conservative MP Tony Clement said in a statement that the PBO numbers show that the Liberals will run larger deficits than the party promised during the election campaign.

"We want to know how the Liberals will avoid falling deeper into the fiscal hole," he said.