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When the Liberal Party released its election platform last fall, we described it as looking a lot like its winning platform from 2015, only less ambitious. That’s because, compared to four years earlier, the government had less spending room for new, big ticket items. As a result, we wrote that what the Liberals were promising for the next four years was not so much “more of the same” as “a bit less of the same.”

Get us rewrite: As of Monday, the Trudeau government could be even further constrained – able to afford even less than a bit less. That was the upshot of Finance Minister Bill Morneau’s fall fiscal update, which predicts tens of billions of dollars’ worth of higher deficits over the next few years, even without tallying up most Liberal campaign promises.

At first glance, it looks as if the Trudeau government is already out of spending room.

Merry Christmas, Ottawa: Your new credit limit is zero. Knock yourself out at the mall on Boxing Day.

But look a bit closer. Mr. Morneau’s extra helping of red ink comes with a very large asterisk. These expected higher federal deficits are not about a collapse in revenues, or a sudden spike in spending. What’s at work here is an actuarial adjustment, caused by historically low interest rates.

Over the next four years, the fiscal projections include an extra $31.2-billion of accounting charges for federal employee benefits and pensions. That’s not because Ottawa just went on a hiring spree or secretly enriched the pensions of the country’s bureaucrats. It’s because, if interest rates remain low, then expected returns on pension investments will be low. And if returns are low, then more money will, eventually, need to be set aside to pay the future pensions of current government employees.

Those expectations of future obligations are landing on Ottawa’s operating budget, right now, adding notional red ink to the bottom line and arguably making the deficit look worse than it really is.

However, if and when interest rates rise, today’s accounting charges will reverse and turn into tomorrow’s credits. That would temporarily make deficits look smaller than they really are. (People like to believe accounting is black and white, but it often involves judgment calls on philosophical questions that have no pat answers.)

As the fiscal update notes, an annual estimate of the notional current costs of future pension obligations is necessary, but it “can also result in large swings in the budgetary balance, which have the potential to obscure underlying trends in government spending, and can make prudent fiscal management more challenging.” Can it ever. The current interest-rate environment just delivered such a large swing.

Next year, the difference between government revenues and government spending will be $18.2-billion. A deficit of that size is small enough to deliver a falling debt-to-GDP ratio – the Trudeau government’s preferred metric, and ours – while leaving room for some additional spending or tax cuts. However, when next year’s expected actuarial adjustments are subtracted from the equation, Ottawa is suddenly looking at a 2020-21 deficit of $28.1-billion. That’s large enough that the debt-to-GDP ratio, instead of falling, will remain unchanged. Room for extra spending? Nil, apparently.

This week’s fiscal update lands at an opportune time for the government. Right now, every province has its hand out, demanding more money for health, public transit, housing and, in the case of Alberta and Saskatchewan, one-time payments to compensate for drops in resource revenues. Mr. Morneau has said he will listen to provincial pleas. He can now do so while insisting his cupboard is bare.

Is it really? Not exactly. Next’s year’s projected deficit, including those pension adjustments, is large enough that, in the short term, Ottawa has to be cautious about undertaking new spending or tax cuts, beyond the big and questionable tax cut already promised and accounted for. At a cost of $3-billion next year and $6-billion annually at full implementation, it involves gradually increasing the basic personal amount of tax-free income to $15,000 by 2023.

But beyond next year, the Liberal government may find that it has rather more room for fiscal manoeuvres. Mr. Morneau’s projections show a steadily falling deficit and debt-to-GDP ratio beyond 2021-22, even including those large and possibly ephemeral annual charges for pension obligations. Stay tuned.

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