Federal finances in good shape, PBO says

Government has wiggle room to hike spending, according to watchdog

OTTAWA—The federal Liberals could add billions in spending and keep finances sustainable over the long run, Parliament’s budget watchdog says in a report that begins to set the stage for Finance Minister Bill Morneau’s upcoming budget plan.

Parliamentary budget officer Yves Giroux says based on current policies and programs, the government could permanently increase spending or reduce taxes by around $41 billion and maintain its current debt-toGDP ratio over the long term.

That is likely good news for the Liberal government, which has been criticized by the Conservatives for ringing up tens of billions of dollars in additional debt in recent years even as it looks to introduce a new budget in the coming weeks.

Giroux said in an interview the government has fiscal wiggle room to increase spending under current conditions, but warned “that could change if the government were to change program parameters or go on a spending spree of some kind or establish new programs.”

Next year’s deficit is expected to be $28.1 billion, before accounting for election promises the Liberals will unveil in their 2020 budget, such as a national pharmacare program.

Morneau told the House of Commons finance committee earlier this month that he was working through the budget to “demonstrate fiscal responsibility” and ensure “Canadians can meet affordability challenges.” The government doesn’t foresee a radical cut in spending, he said at the time.

“Clearly, taking a significant amount out of the economy rapidly would have a negative impact on growth,” Morneau said.

The coming days will provide more inputs into the government’s calculations. On Friday, Statistics Canada will unveil how the economy fared in the last three months of 2019. Then next week, the Bank of Canada unveils a decision on its trendsetting interest rate.

Forecasts from the bank and Giroux suggest Friday’s figures will show a slowdown, due in part to a shutdown in traffic during a CN Rail strike in November, that will spill into the first few months of 2020.

Further dampening economic expectations is the novel coronavirus outbreak that has shut down Chinese factories that Canadian companies rely on, disrupted exports to China and affected global supply chains.

“We were already expecting this year’s federal budget to lean into stimulus, with spending and the deficit ramping up, and deepening coronavirus concerns simply reinforce that view,” BMO chief economist Douglas Porter wrote in a research note this week.