How timid economic forecast might just protect you

Economists say Budget 2017 is based on some cautious assumptions about the pace of Canada’s economic growth. Ottawa’s timidity is important because it just might keep your taxes from going up.

According to the 278page budget document delivered on Wednesday, the federal government believes Canada’s gross domestic product will grow by 1.9 per cent this year.

That forecast is based on the economic data that was available last December. Since then, fresh statistics suggest Canada is on track to perform much better. According to a survey of 26 private sector analysts by Bloomberg News, Canada’s economy will actually grow 2.1 per cent in 2017. And that’s just a median. Some banks, such as TD and BMO, see Canada’s GDP growing 2.3 per cent this year.

“Ottawa’s economic assumptions are based on a somewhat outdated private-sector forecast, taken before the economy began to flash real signs of improvement,” write Douglas Porter, chief economist, and Robert Kavcic, senior economist, with BMO Capital Markets. “Since that consensus forecast was locked in late last year, we’ve seen a near-relentless run of positive economic data, with particular strength in employment.”

Here’s how this reaches right into your wallet. Stronger economic growth brightens the government’s revenue prospects, and that puts less pressure on the government to narrow the deficit by hiking taxes.

The government is forecasting a deficit of $28.5 billion for the fiscal year ending March 31, 2018. That includes a $3 billion “allowance for risk” or contingency that captures any forecasting errors on the revenue side or unforeseen needs on the spending side.

According to CIBC, every half-per cent overshoot in GDP is worth $2.4 billion to the fiscal balance. In other words, an economy that outperforms the government’s expectations would boost revenue and leave the $3 billion contingency account untouched, writes Avery Shenfeld, chief economist of CIBC Capital Markets. “As long as the economy grows in line with its forecast, there’s no pressing need to tax some Canadians more...”

In the lead-up to the release of Budget 2017, there was a lot of concern that the federal government would boost taxes on capital gains or introduce other tax measures that target higher income individuals. None of those fears materialized. The government will likely be content to live with a revenue stream that keeps Canada’s debt-to-GDP ratio steady. It forecasts the debt-to-GDP ratio to be 31.6 of nominal GDP for fiscal 2018 and 2019. “Hot-button issues, such as changes to the capital gains tax and the potential sale of airports, were not acted upon,” wrote Beata Caranci, chief economist and Brian DePratto, senior economist, with TD economics.