The Liberal government is setting the stage for a budget deficit that will be nearly three times the maximum $10-billion the party promised during the election campaign.
Finance Minister Bill Morneau took the unusual move of revising his own November fiscal update in an effort to highlight the degree to which the economy is underperforming expectations from just three months ago, largely because of persistently low oil prices.
At a town-hall event in Ottawa, Mr. Morneau announced that Ottawa is on track to run an $18.4-billion deficit next year, even before adding the billions in new spending promised by the Liberals during the election campaign. He also announced that the budget will be released on Tuesday, March 22.
The Liberals campaigned on a plan to run deficits of up to $10-billion a year to fund new spending, which means that, roughly estimated, delivering on those promises would push the size of next year's projected deficit to nearly $30-billion.
"Our starting point is much further back than we thought," Mr. Morneau explained. On Tuesday, the minister will face questions from MPs when he appears before the House of Commons finance committee. He then heads to Shanghai, China, for a meeting of G20 finance ministers and central bankers.
The decision to update the bottom line just four weeks before releasing the budget is viewed as an attempt to get the government's bad deficit news out of the way early in order to increase public attention on the party's plans to boost the economy. The minister made clear Monday that the government is not backing down from its spending promises in areas such as infrastructure.
Interim Conservative leader Rona Ambrose said the worsening economy should cause the Liberals to review and scale back their spending rather then break their promise to keep deficits under $10-billion.
"This is a recipe for waste and mismanagement," said Ms. Ambrose, describing the Liberal approach to deficits as reckless and irresponsible.
"The reality now is that it is not a time to spend. Based on slow economic growth, it's a time for the Finance Minister to talk about controlling spending," she said.
Prime Minister Justin Trudeau responded in Question Period, saying Canadians rejected the Conservative approach and voted for a party that will invest in the economy.
"That's what we got elected to do and that's what we are going to deliver," he said.
Monday's update to the update lowers the 2016 forecast for North American crude prices to $40 (U.S.) from $54.
Private-sector economists have generally been in favour of some fiscal stimulus from Ottawa, especially given the fact that the Bank of Canada has largely run out of room to lower interest rates.
National Bank economist Marc Pinsonneault said the expected size of the deficits should not scare off foreign investors and will still keep Canada's debt-to-GDP ratio relatively low.
"In our view, the government has the flexibility to provide fiscal stimulus to a Canadian economy that badly needs it," he said.
However, one Bay Street economist warned that Ottawa must be careful that Canada's stellar credit rating is not put at risk.
"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," Doug Porter, chief economist at BMO Capital Markets in Toronto, said in a research note.
Mr. Porter added in an interview that Ottawa's credit rating is indirectly tied to the strength of provincial finances and several provinces are struggling with high debt, meaning the federal government must keep provincial finances in mind as it takes on new debt of its own.
Finance Canada bases its budget numbers on an average forecast from private-sector economists. That average is now significantly lower for 2015 and 2016, though largely unchanged for 2017.
The November fiscal update assumed nominal growth, which includes inflation, would reach 4.2 per cent in 2016. That has since been reduced to 2.4 per cent. The average nominal GDP forecast for 2017 of 4.6-per-cent growth has not changed.
The government's deficit forecast includes a doubling of the commonly used cushion for risk. Rather than including $3-billion (Canadian) a year for unforeseen events or forecasting errors, the latest update raises that adjustment to $6-billion a year in both 2016-17 and 2017-18.
That means that without the adjustment for risk, the projected deficit would be $12.4-billion for next year, rather than the $18.4-billion announced Monday. The government argues this adjustment is prudent in light of the high level of uncertainty related to current economic forecasts.
But observers say the large forecasting cushion could also be setting the stage for Mr. Morneau to beat his targets in future years, which is a common political tactic.
"It's almost as if he's trying to get any possible bad news out of the way on the economic front and build in a worst-case scenario," said Mr. Porter.