A new Parliamentary Budget Office forecast says slower economic growth will mean slightly larger deficits in the coming years – even before the minority Liberal government adds on the billions in new spending promised during the election campaign.
As the head of a minority Parliament, Prime Minister Justin Trudeau’s political survival counts on crafting a plan that delivers on his own promises, while also accommodating at least some priorities from other parties.
That balancing act – which is playing out this week as Mr. Trudeau meets individually with party leaders ahead of the Throne Speech on Dec. 5 – will now be harder as economic factors lead to a deteriorating fiscal forecast.
Parliamentary Budget Officer Yves Giroux released a fiscal baseline projection in June that all parties used as the starting point for their campaign platforms.
Thursday’s PBO report said it now projects deficits that are $1.6-billion larger, on average, over the six year period from 2019-20 to 2024-25, based on revised growth projections.
The changes to the PBO forecast largely affect the outlying years of the forecast, starting in 2021-22. The deficit for that year has now been revised from $15.4-billion to $19-billion.
The PBO continues to project a deficit of $23.3-billion in 2020-21. That amount translates into a deficit of 1 per cent of GDP, a threshold that many economists say is the limit of what could be considered a small deficit.
The PBO report stresses that Thursday’s report does not include any new spending promised during the 2019 election campaign.
The Liberal Party’s 2019 platform promised $56.9-billion in new spending and tax cuts over four years, which would be partly offset by $25.4-billion in new revenue through spending reviews and targeted tax increases on high-income earners, such as a new 10-per-cent tax on luxury cars, boats and planes worth more than $100,000.
According to the platform, the Liberals said they would run a $27.4-billion deficit in 2020-21 and that the size of the deficit would decline gradually to $21-billion by 2023-24. The Liberal Party promised in 2015 to run short-term deficits and balance the books in time for the next election. That did not happen and the 2019 Liberal platform did not promise a balanced budget.
Instead, the Liberal government has pledged to keep the debt-to-GDP ratio on a declining trend. Thursday’s PBO report shows the federal debt-to-GDP declining from 30.8 per cent in 2020-21 to 28.7 per cent in 2024-25, before accounting for new spending.
Craig Alexander, chief economist for Deloitte Canada, said the government will face hard decisions as it increases spending during a period of slower growth.
“The challenge we have in the wake of the latest election is that there’s not going to be a lot of additional money in the fiscal coffers to pay for significant new expenditures without the debt-to-GDP ratio rising,” he said.
Mr. Alexander said that could force the Liberal government to either abandon its debt-to-GDP ratio target or use the target as a rationale for delaying some new spending. He also said that minority Parliaments tend to involve deal-making with other parties to get budgets approved by Parliament.
“The minority government situation makes it possible that we could have larger deficits than we would have had under a majority government,” he said.
The Liberal government will likely release its own fall fiscal update based on Finance Department projections, although no formal announcement has been made. Federal ministers have avoided making major announcements ahead of Nov. 20, when Mr. Trudeau has said he will announce who is included in his revised cabinet.