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There were no soothing pastels in the fiscal picture that the Parliamentary Budget Officer sketched this week, just dark tones.

Compared with the PBO’s projection last October, federal revenues are weakening, expenses are rising and debt is piling up faster than forecast. And that is before accounting for the new pharmacare program and any other fresh spending the Liberals choose to pile on top of those already stretched finances.

The PBO is forecasting a deficit for the current fiscal year of $46.8-billion, much higher than the government’s projection of $40-billion in the November update. That gap is potentially a big political problem for the Liberals, since Finance Minister Chrystia Freeland vowed in November that the deficit for fiscal 2023-24 would not exceed $40.1-billion, the first of three fiscal guideposts she laid down at that time.

In an interview, PBO Yves Giroux said the Finance department has access to better data on expense trends, and that alone may explain the $6.8-billion gap. And the government recently conspicuously cashiered two spending programs: loans for first-time home buyers and technology grants for small businesses.

So, the Liberals may squeeze spending enough to allow Ms. Freeland to keep to her deficit target for the current fiscal year when she tables the federal budget on April 16. But the PBO’s numbers underscore how little manoeuvring room the government has.

In the fall of 2020, for instance, the Liberals forecast spending of $408.5-billion in fiscal 2022-23; the final tally ended up at $483.1-billion, an increase of 18 per cent. For the current fiscal year, the government initially forecast spending of $420.6-billion, but by last fall that total had jumped to $496.3-billion, another 18-per-cent increase.

True, some of that increase was from rising debt costs. Equally true, Ottawa chose not to offset those rising debt costs and instead added even more program spending, as has been their habit since taking office in 2015.

The Liberals will either need to break with their habit of rolling out major new spending or break their promises of fiscal prudence if Ms. Freeland doesn’t want to blow past her deficit guidepost.

History and current events aren’t encouraging. For a start, the Liberals have yet to stick with a fiscal goal for very long. Justin Trudeau campaigned on a plan for three years of limited deficits; that pledge was abandoned before the Liberals’ first budget. Then came former finance minister Bill Morneau’s pledge to reduce the debt-to-GDP ratio to 30 per cent; success was always a year or two in the future. Then the came the unprecedented surge in spending during the pandemic.

Ms. Freeland initially resisted any kind of fiscal anchor, before eventually settling on a goal to reduce the debt-to-GDP ratio over the medium term (while declining to provide a more specific timeline). That left the Liberals ample scope to bump up spending. Inflation pushed up nominal GDP, and any rise in debt-to-GDP could be waved away as being too short-lived to qualify as a medium-term rise.

Last fall, the Finance Minister made specific fiscal pledges, albeit in a convoluted manner. There was the $40.1-billion, or less, target for this year’s deficit. For the upcoming fiscal year, Ms. Freeland said the ratio of federal debt to the size of the economy would be lower than the fall forecast of 42.7 per cent; the size of the deficit, relative to GDP, would decline in the coming fiscal year. By fiscal 2026-27, the Liberals have promised that the deficit will be less than 1 per cent of GDP.

Sticking to those targets doesn’t leave much in the way of pre-election largesse. For the upcoming fiscal year, the PBO’s figures indicate that the Liberals could increase spending from current projections by about 3 per cent – a pittance compared to previous years. And some part of that is already spoken for, as the government launches its (limited) pharmacare program.

The NDP, whose support through a parliamentary alliance has safeguarded the Liberals’ hold on power, will be pushing for a fiscal roadmap leading to full-fledged federal pharmacare, which would cost tens of billions a year.

An election looms next year, if not before, with the Liberals now lagging the Conservatives by nearly 20 points in the polls and running third in much of the country. That deficit truly worries the Liberals; the other sort, with merely the fiscal future of the country at stake, may have to give way.`

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