The Liberal government's fall update will announce that Ottawa is using some of the fiscal room it has found thanks to stronger economic growth to approve new measures aimed at the middle class rather than simply posting smaller deficits.
Finance Minister Bill Morneau is scheduled to release his fall economic update on Tuesday at 4 p.m. in the House of Commons after markets close.
Stronger-than-expected economic growth will allow Mr. Morneau to beat his March forecast of a $28.5-billion deficit for 2017-18. Whether to post smaller deficits or use some of that room to fund new policies was a subject of debate when Mr. Morneau met recently with private-sector economists in preparation for the update.
The answer will be a bit of both, according to a senior government official, who said the measures will benefit the middle class, but declined to outline whether they will include new spending or tax cuts.
The official said the new measures will be consistent with earlier policy moves that the government says have contributed to stronger economic growth.
The CBC reported on Monday that the update will "foreshadow" a further enhancement of the Canada Child Benefit, with more details to come later in the week. An increase in the CCB was one of the first major policy actions of the Liberal government, and the Bank of Canada has said that policy has contributed to stronger growth by boosting consumption.
Mr. Morneau signalled in the House of Commons on Monday that his update will show federal finances have improved.
"The good news is that we are going to be able to announce [on Tuesday] a very positive economic update," he said. "We have a situation where we have worked for a couple of years – and we know there is much more work to be done – but that interim report card is going to be so important for Canadians to have confidence in their future and the future of their families."
The fall update is the federal government's opportunity to revise its fiscal projections at about the halfway mark of the fiscal year to account for new growth projections and policy decisions announced since the budget. For instance, the update will provide an official estimate of the cost of reducing the small-business tax rate from 10.5 per cent to 9 per cent by 2019, which Mr. Morneau announced last week.
Liberals are also hoping a largely positive fiscal update will help Mr. Morneau politically at a time when he is on the defensive on several fronts. The Finance Minister has been the central target of the opposition parties for weeks, first over his controversial changes to small-business tax rules, and then over The Globe and Mail's report that he had not placed his personal wealth in a blind trust, raising questions over potential conflicts of interest.
In recent days, some private-sector economists have urged Mr. Morneau not to introduce any new fiscal stimulus into the economy given the positive outlook for economic growth. Rather, some had called for the federal government to reduce its role in the Canadian economy by running smaller deficits.
RBC economist Josh Nye said any new measures announced on Tuesday might lead Bank of Canada Governor Stephen Poloz to raise interest rates more quickly, which could be bad news for consumers and home owners.
Mr. Nye said at this point in the economic cycle, it is better for governments to build up fiscal room so they can stimulate growth during lean times.
"The economy is close to full capacity, so this really isn't the time to need to see significant deficits for five or six years to come," Mr. Nye said. "Any additional fiscal stimulus could simply be inflationary and offset by the Bank of Canada. Usually, you want to see higher government spending during an economic downturn when the government can sort of fill in for the private sector, but that's really not the case we're in now."
BMO chief economist Doug Porter said he would also prefer smaller deficits. "My view is that with the underlying economy growing rapidly, this really isn't the time for fiscal stimulus," he said.
New measures could help the economy depending on the details, Mr. Porter said.
"I'll reserve judgment until I see the size of the measures we're talking about," he said. "If they're modest and if they're really aimed at strengthening the long-run growth outlook, then I wouldn't have a big issue with it."
The March 22 federal budget – which was based on an average of private-sector surveys conducted in December –assumed the Canadian economy would grow by 1.9 per cent in 2017. Now, many economists are forecasting growth of 3 per cent or more.
Finance Canada's usual estimate is that a 1 per cent improvement in GDP over the forecast will improve the bottom line by about $4.7-billion.
The deficit for 2016-17 came in at $17.8-billion, which was a sharp increase from the $987-million deficit the previous year, but a significant improvement over the $29.4-billion Mr. Morneau had originally estimated in his 2016 budget.
The better-than-expected final numbers for last year are also expected to contribute to an improved bottom line this year.
The Liberal Party's 2015 election platform said that a Liberal government would run annual deficits of no more than $10-billion a year before returning to balanced budgets in 2019.
The Liberal government has abandoned that plan and does not currently have a target date for erasing the deficit. Instead, the government says its goal is to keep the federal debt-to-GDP ratio on a stable and declining trend.