Finance Minister Bill Morneau is a lucky man – at least when it comes to the economy.
An unexpected fiscal dividend has landed in his lap thanks to Canada's surprise growth spurt this year. The boom means Ottawa's budget deficit will be an average of $8.5-billion a year lower for the next few years than it forecast just seven months ago, according to the government's fall economic statement, released on Tuesday. In the current fiscal year, the projected deficit of $28.5-billion has shrunk to less than $20-billion.
And Mr. Morneau says he intends to take "full advantage … of the strong economic performance." He's spending nearly $2-billion a year of the windfall to cut the small-business tax rate, index the Canada Child Benefit and boost a tax credit for low-income workers.
The problem is the dividend is a bit of a mirage, just as the March budget forecast was. It's all based on an average of what private-sector forecasters expect to happen in the months and years ahead – and they are invariably wrong.
The economy is already slowing down after a blistering start to the year.
As Laurentian Bank Securities chief economist Sébastien Lavoie pointed out in a research note Tuesday: "Economic momentum is fading."
It's as if Mr. Morneau was driving a car while looking in the rear-view mirror. The GDP forecast contained in the update is already a month old.
Yes, the economy has been great so far this year – surging 3.7 per cent and 4.5 per cent, respectively, in the first two quarters to lead all Group of Seven countries. That has put the economy on track to grow 3.1 per cent this year – nearly a full percentage-point better than forecasts in March.
But dark clouds are already gathering on the horizon. And the forecast six months from now could look dramatically different if any, or all, of the following events materialize: a correction in the housing market brought on by higher interest rates and tougher mortgage rules; a pull-back in consumer spending; a sharp reversal in record-high stock markets; or the failure of the continuing North American free-trade agreement talks. The fiscal update makes no mention of a collapse of NAFTA, although it acknowledges that "uncertainties over U.S. economic policies" could sap Canadian business confidence.
In a nod to all this uncertainty, Bank of Canada Governor Stephen Poloz is widely expected to pause Wednesday after raising the central bank's key interest rate twice this year. How far and how fast Mr. Poloz will be able to push rates higher in the months ahead remains unclear.
Consumers, who have been driving Canada's economy of late, are already looking a little tapped out. Retail sales fell in July and again in August. And their willingness will be tested as interest rates edge higher. Household debt levels are at record levels.
Mr. Morneau's fiscal update acknowledges some of these risks. But the fiscal update judges that these risks "appear broadly balanced." In other words, Ottawa believes it's equally likely that the economy will grow faster than expected, rather than slower.
The biggest upside risk is that the global and U.S. economies grow much more rapidly than expected, driving demand for everything Canada exports.
Given the stage of the business cycle, that seems to be a pretty bold assumption. The current economic expansion in the United States is now the third longest since the Second World War.
Chances are the next recession in the United States and Canada is a lot closer than Mr. Morneau expects.
Just as in Canada, the U.S. Federal Reserve is trying to push interest rates higher – increasing the risks of a consumer and business slowdown.
The one thing Canadians can be assured of is that the latest fiscal update will prove to be just as unreliable as the last budget – and the next one – in predicting how big the deficit will be two and three years out, or whether it's likely to shrink or grow.
Indeed, Ottawa acknowledges that if it based its budget projection on the four most pessimistic private-sector economic forecasts, the deficit would grow by an average of $4-billion a year.
The update projects the budget deficit will shrink to $12.5-billion in 2022-23 from $19.9-billion in 2017-18.
A whole lot could happen in the next few months to blow a big hole in these projections.