Rising rates could give Liberals extra fiscal room: PBO report

OTTAWA The Liberal government could enjoy billions of dollars worth of extra breathing room in its pre-election budget next year, as rising interest rates dramatically reduce some of Ottawa’s key personnel expenses, a new report says.

Parliamentary Budget Officer Jean-Denis Frechette will release a study Tuesday that finds government expenses tied to pensions and disability benefits could fall as much as $8 billion per year by 2023 — leaving the Liberals with an opportunity to forecast substantially smaller deficits just ahead of the 2019 election.

The extra fiscal room is the result of an accounting practice that links the perceived future value of pension and disability liabilities to interest rates. As interest rates rise, the future amount owing on those liabilities effectively declines, in turn lowering the amount of money governments need to set aside every year to cover the expense.

The PBO report digs into the federal government’s roughly $130-billion pool for direct program spending — a long under-monitored and notoriously opaque section of the public purse.

Roughly $50 billion of direct program spending goes toward government personnel, either in the form of wages, employment insurance contributions, pension contributions, or health and dental coverage.

Over the past 10 years, the report found, expenses tied to pension contributions and disability benefits have ballooned from $2 billion per year to roughly $10 billion. Now, with interest rates expected to rise, those expenses could fall sharply in the next five years, down to around their previous levels.

The fiscal boost comes just as Finance Minister Bill Morneau faces criticism that the federal government has not placed enough emphasis on balancing its books, instead driving up its fiscal stimulus measures and piling money into research and development programs.

The Liberals’ 2018-19 budget ran a $18.1-billion deficit, including a $3-billion adjustment for risk. That will fall to $17.5 billion in 2019-20.

Most economists and analysts expect the Bank of Canada to continue hiking its key interest rate this year, after the economy outpaced growth expectations early in 2017, growing three per cent over the year.