The Liberal government will have to reassess the size of its proposed deficits after a deteriorating economy turned a surplus into a shortfall even before Justin Trudeau and his ministers start meeting billions of dollars in campaign commitments.
In his first fiscal update since being appointed Finance Minister just over two weeks ago, Bill Morneau said Friday that a sluggish global economy and falling oil prices have created a worse fiscal situation than was predicted by the former Conservative government in the spring budget.
"Going forward, the risks to the Canadian outlook remain tilted to the downside," Mr. Morneau told a news conference. "We wanted to show this is a situation that we've inherited."
Reduced income-tax revenue and increased employment-insurance expenditures have lowered the balance that was forecast in the spring budget by about $6-billion, he said. Instead of the $2.7-billion surplus that was anticipated by the Conservatives, the Liberal government is predicting a $3.9-billion deficit for the next fiscal year – before its billions of dollars in election commitments have been factored in.
Mr. Trudeau said during the campaign that, if elected, he would run "modest" deficits of up to $10-billion in each of the next three years: $9.8-billion and $9.5-billion in the first two years, and $5.7-billion in 2018-19. Much of that money is slated for an infrastructure program that the Liberals say will create economic growth.
Mr. Morneau repeatedly ducked questions about whether the government is now willing to run deficits in excess of $10-billion, given that the federal books are already in the red. But, he said, he wants Canadians to know that the government remains committed to implementing its campaign platform in a way that is both responsible and affordable.
"We are in the early days. We've given a starting point for Canadians. We intend on keeping our commitments to Canadians," he told a news conference. "We believe that, together with our promises for investments, we will be able to come up with a budget that will show Canadians that we will achieve our goals."
The minister also said he remains committed to balancing the budget in 2019-20 and to maintaining a declining debt-to-GDP ratio throughout his four-year mandate.
Robert Kavcic, a senior economist with BMO capital markets, said in a commentary that Friday's fiscal update was "not a big deal" from an economic standpoint – that it merely turned a small surplus into a small deficit. "The more meaningful update (and presumably larger deficits) will come as the government begins to roll out new policy measures," he said.
A Toronto Dominion economist, Brian DePratto, predicted in a similar type of commentary that deficits of $13-billion to $14-billion can be expected starting in 2016, given the new forecast.
According to the fiscal update, the Canadian economy contracted in the first half of 2015, with real gross domestic product (GDP) declining by 0.8 per cent in the first quarter and 0.5 per cent in the second quarter. Private-sector economists are now predicting real GDP growth of just 1.2 per cent in 2015, compared with 2.4 per cent in 2014. That is expected to rebound slightly to 2 per cent in 2016.
Lisa Raitt, the finance critic for the Conservatives who are now the Official Opposition, said the fiscal monitor that was released Friday shows the government ran a surplus of $1.6-billion in the first half of the fiscal year. So, the government is saying it will be going heavily into deficit over the next six months, Ms. Raitt said.
"We think it's a strong signal that the global economy is still uncertain and it's more prudent to make sure that we have a balanced budget," she said. "They say they are going to run a deficit. How big is too big? How much are they going to run? That's the question that we have – and just caution about not doing things that are going to cause greater instability."
Guy Caron, the NDP finance critic, said he is concerned that the Liberals are playing "the cupboard is bare routine" as a precursor to reneging on spending promises. The Liberals, Mr. Caron said, should not look for excuses to break their commitments to Canadians.