Even before Ottawa released its prebudget fiscal and economic update on Monday, we had a pretty good idea that we were headed for a much bigger budget deficit than the new Liberal government had promised in its fall election campaign. How much bigger? That depends on how much trust you place in economic forecasters – at a time when the Finance Department itself has lost its faith.
The new estimates, revealed by rookie Finance Minister Bill Morneau as he announced that he would table his first budget precisely one month hence, laid bare the bleak situation he finds himself in. The panel of private-sector forecasters that the Finance Department relies on for guidance now forecasts real economic growth (i.e. excluding inflation) of just 1.4 per cent in 2016, down from 2 per cent they projected in the previous outlook in November. The slumping growth translates to an $18.4-billion budget deficit for the coming fiscal 2016-2017 year – and that's before the big infrastructure spending plan that was the cornerstone of the Liberals' election campaign. Once that plan is incorporated into the March 22 budget, we're probably looking at a deficit of somewhere between $25-billion and $30-billion.
As economists have slashed their growth forecasts over the past couple of months, even that 1.4-per-cent growth forecast could be optimistic. Some prominent private-sector forecasters are projecting something closer to 1 per cent. Even those with higher forecasts concur that the risk to the forecast, as of now, is tilted distinctly to the downside.
This is what the economic panel told Mr. Morneau at a meeting in Toronto earlier this month, and clearly he took it to heart. Finance cut $40-billion from the economists' forecast for 2016 nominal gross domestic product – the broad measure of the economy that's the critical determinant of government revenue – as its "adjustment for planning purposes." That equates to a contingency built into the new numbers of $6-billion; if it turns out the economists' forecasts are accurate, the $18-billion deficit figure would shrink by a third.
By contrast, the previous Conservative government's final budget, in the spring of 2015, trimmed a mere $7-billion off nominal GDP forecasts to adjust for risk, even with Canada in the depths of the oil shock. It resulted in a slim $1-billion contingency built into the budget numbers, down from $3-billion the previous year. Conveniently, the difference allowed the Harper government to budget for a small surplus, something it had promised in its previous election campaign.
So the new government is building in a considerable cushion indeed for the risk that private-sector forecasts prove overoptimistic. One is tempted to call "politics" – the Liberals, after all, learned from one of the best, former Liberal finance minister Paul Martin in the 1990s, about the PR value of building enough wiggle room into your budgets to generate better-than-budgeted results.
Still, recent history justifies a heaping helping of prudence. The public-sector economists have reduced their forecast for 2016 nominal GDP by about $40-billion, or nearly 2 per cent, in just four months. That's equal to the entire budget contingency right there.
Their forecast for the average price of oil in 2016 has fallen by $14 (U.S.) a barrel, or more than 25 per cent, in the same period. And at $40 a barrel, the current forecast still requires a leap of faith, given that the current price is barely above $30. Every $10-a-barrel drop in the oil price delivers a hit of about $25-billion to Canada's nominal GDP.
The private-sector forecasters, frankly, don't have much of a recent record for accuracy in the critically important nominal-GDP projections. A $40-billion miss is about par for the course over the past several Finance Department surveys of private-sector economists. Economist Stephen Tapp of the Institute for Research on Public Policy points out that the public-sector forecasts used by Finance have been consistently overoptimistic on numerous fronts over the past several years, particularly on interest rates and oil prices.
But let's just say, for the sake of argument, that the private-sector forecasts have it right this time. It would certainly make the projected budget deficits look less onerous – perhaps even enough to bring the Liberal election pledge of a return to balance by 2019-20 back into view. But perhaps the bigger issue is whether the Canadian economy is going to get much of a stimulus from this deficit spending when it most needs it.
In the four months since the election, and three months since the fall fiscal update, the Liberals have moved agonizingly slowly on their infrastructure investment pledge, even as the economy has continued to deteriorate. It now looks likely that we'll have to wait at least another month, to the budget itself, for the big unveil. Infrastructure spending may pay higher economic dividends in the long run than other forms of stimulus spending, but they are notoriously slow to get up to speed, even once firm commitments have been made. It's increasingly likely that relatively little of this spending will make its way into the economy this year.
While the private-sector forecasts for nominal GDP growth for 2016 (2.4 per cent) is now half of what it was in the spring, 2015, budget, the forecast for 2017 has barely budged (4.6 per cent now, the same as in the fall update, versus 4.7 per cent last spring). If they're right, by the time much of the infrastructure spending stimulus takes hold, growth won't be in dire need of stimulation any more.