Canada could face $50-billion in deficits over two years, economists say

Canada’s young government faces the prospect of $50-billion in deficits over two years as the economic outlook weakens, a new forecast suggests.

Prime Minister Justin Trudeau’s Liberals have already pledged deficit spending to help break out of the slump, but economists at National Bank of Canada project an ever-mounting bill.

But Ottawa can afford it, and Canada needs it, Krishen Rangasamy and Warren Lovely argue in their recent report.

“The federal government may not directly collect natural resource royalties, but Ottawa must come to terms with a new, weaker nominal GDP profile,” they said.

“We’re inclined to view the downward adjustment in November’s fiscal update as a warm-up act for this spring’s federal budget.”

Here’s how they see it:

Based on National Bank’s now softer outlook for economic growth, the underlying deficits are heading for about $15-billion a year over two years, even before the promised stimulus measures.

“If anything, acute economic weakness in oil-producing provinces and the reduced effectiveness of conventional monetary policy argues for an accelerated and/or enlarged stimulus response from a sovereign with fiscal capacity to spare,” Mr. Rangasamy and Mr. Lovely said.

“Indeed, the federal stimulus promised by the Liberals on the campaign trail could take the federal budget shortfall to roughly $25-billion/year, or a bit above 1 per cent of GDP,” they added.

“But given earlier success in working down the debt burden, Ottawa could afford to run a couple years of even larger deficits ($30-35-billion) without eroding its long-term fiscal sustainability.”

The government has given no details of its plan, beyond what the Liberals pledged during the election campaign, though it has touted its benefits, as have economists.

And so much depends on oil prices, of course, and many earlier forecasts are now out the window.

The National Bank economists now see real economic growth of just 0.9 per cent this year, and 1.7 per cent in 2017.

Their projections are well below the Bank of Canada’s call for 1.4 per cent and 2.4 per cent.

They also see business investment continuing to plunge, by 1.3 per cent this year, and 0.3 per cent next year, also a bleaker picture than the central bank has forecast.

Troubling, too, is that Mr. Rangasamy and Mr. Lovely see unemployment peaking at 7.4 per cent this year.

The National Bank economists are not alone, though they have gone further by putting numbers to paper.

“While fiscal stimulus will help to counteract any potential slowdown in the economy this year, if the [Bank of Canada’s] overly optimistic GDP forecasts are any indication of the assumptions the federal government is using to plan its 2016 budget, then it will most likely underestimate the amount of fiscal stimulus needed in the economy,” said David Madani of Capital Economics.

“Policy makers are in danger of being far too gradualist in their responses to the rapid deterioration in the economic outlook.”

Mr. Madani also cited the fact that the Liberal stimulus plan appears primarily to be all about added infrastructure money.

“The problem is that if the government can’t find enough ‘shovel-ready’ projects, that money may not end up being spent until 2017 or even later,” he said.

“The economy needs stimulus now, so the new Liberal government may need to consider some tax relief, too.”

Other economists have noted that, depending on the plan, shovels may not get in the ground until summer at the earliest.

More on this topic

• Bill Curry and Barrie McKenna: BoC holds rates as it awaits stimulus
• David Parkinson: Liberals must invest efficiently in infrastructure
• Campbell Clark: Liberals get political cover for larger deficits
• Trudeau, Poloz and the analyst: Glass half full to half empty to empty