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The Parliamentary Budget Officer is projecting this year’s federal deficit will be $328.5-billion, which is smaller than what the Liberal government is currently projecting, but does not account for the many spending promises outlined in last week’s Speech from the Throne.

In a report released Tuesday, the PBO updated the independent office’s fiscal projections based on government announcements up to Sept. 1.

The federal government said in a July “fiscal snapshot” that the federal deficit would be $343.2-billion for 2020-21. It has since announced billions in additional spending, including an extension of income supports for individuals. Prior to the COVID-19 pandemic, the Finance Department was projecting a $26.6-billion deficit for the current fiscal year, which began April 1.

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The PBO said the main reasons why its projected deficit numbers are smaller than the government’s is owing to different assumptions. The office is forecasting that economic growth will be stronger than the ministry expects, and tax revenue will not be hit as hard.

Parliamentary Budget Officer Yves Giroux told reporters Tuesday that as long as temporary pandemic spending is wound down as currently planned, federal finances are sustainable, but "barely.”

“It wouldn’t take that much in terms of new spending, or even tax cuts, for federal debt to become unsustainable, or an increase in interest rates that would be faster than what we anticipate. So it’s sustainable, but really, barely," he said.

“If we were to get into a prolonged pandemic, or if the economy was to fare less well than we anticipate, or there were to be significant long-term spending commitments made, then there would probably need to be something done to ensure that the fiscal sustainability of federal finances are guaranteed in the medium term. And that could be reductions in spending elsewhere or tax increases."

The federal government has yet to release a 2020 budget, meaning no official projections for Ottawa’s bottom line beyond the current year have been released since the onset of the pandemic. Finance Minister Chrystia Freeland has promised to release a fiscal update this fall.

In June, Fitch Ratings downgraded Canada’s triple-A credit rating to double-A-plus based on its pandemic spending. In a statement last week, Fitch Ratings issued another warning.

Fitch said that Canada’s general government debt-to-GDP ratio is already significantly higher than the median of its double-A rated peers, “and failure to set clear post-pandemic fiscal anchors and reduce the federal deficit to sustainable levels after the public health crisis could renew negative ratings pressure.” Other rating agencies have maintained their triple-A ratings for Canada this year.

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Tuesday’s PBO report projects the federal debt-to-GDP ratio, which is a key measure of the health of federal finances, will climb from 31.3 per cent in the 2019-20 fiscal year to a peak of 48.3 per cent in 2022-23, before declining slightly in future years.

The PBO notes that this is still well below the peak of 66.6 per cent of GDP in 1995-96, which triggered a wave of deep cost-cutting in response to bond market concerns.

The report also notes that, due to low interest rates, the cost of servicing the federal debt is approaching record lows.

The PBO report cautions that four potential scenarios could worsen the federal fiscal forecast. These include a severe second wave of COVID-19 infections that triggers new lockdowns, the extension of temporary federal support programs, the launch of new government programs and a rise in interest rates on government debt.

Last week’s Throne Speech included several uncosted promises of new spending, including pledges to fight climate change, expand child-care options, move toward a national pharmacare program and extend the federal wage subsidy through to next summer.

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