Liberals inherit bleak economic prospects
For those Canadians looking for the way forward on the federal government’s deficit-spending program, stay tuned.
The Liberals, in office for just two weeks, are facing drastically lower economic growth in the coming years and a series of budget deficits as they push ahead with plans to plow billions of dollars into infrastructure stimulus projects across the country.
The biggest hurdle, of course, is the economy itself — domestically and globally.
Instead of inheriting a small surplus from the Conservative government, as the fiscal books had previously indicated, the new government finds itself in a $3-billion financing hole — one that’s projected to get bigger before Canada climbs back into a surplus position a few years down the road.
Now, Bill Morneau, like many finance ministers before him, needs to deal with an economic and fiscal situation not of his own making. In this case, the difference between expectations and reality is small, but it will nonetheless make that much harder to fulfil the Liberal’s campaign promises that require even more government spending.
“What we have seen is a deterioration in the global situation, together with a reduction in the price of oil,” Morneau told reporters Friday, following the release of the Finance Department’s economic and fiscal estimates for the next half-dozen years.
“While there is a long history of new governments announcing that the fiscal books of an out-going government are worse than expected, in this case it is simply a legitimate acknowledgment that economic conditions deteriorated dramatically relative to what was in the last budget,” said Craig Alexander, vice-president of the C.D. Howe Institute.
“The real question is how the new government will respond to the weaker fiscal projections,” he said. “Will the government stick to the commitment to run deficits no larger than $10 billion a year, or will they accept larger deficits while still aiming to balance the books in 2019-20?”
The Liberal Party was elected Oct. 19 on a pledge to deliver $10 billion in deficit spending on infrastructure projects over three years, before bringing the federal government’s budget back into a balanced position in the fourth year.
The fiscal update on Friday did not touch on future spending plans by the Liberals — such as infrastructure projects — but it did downgrade the previous Conservative government’s economic and fiscal projections.
“Our goal is to meet all the commitments that we’ve made to Canadians,” Morneau said during his Ottawa news conference.
“And we do know that Canadians want us to be prudent in moving to a budgetary balance over that time frame,” he said. “So, we aspire to meet all of those goals, and we’ll give you more information about them as we do more work. And, certainly, the budget 2016 will be an important marker in that work.”
No date has been set for the budget, which would take effect April 1 and run until the end of March 2017.
“I think it would be too soon” to answer specific questions on the government’s finances, Morneau said.
Robert Kavcic, senior economist at BMO Capital Markets, says the shortfall is fiscally insignificant.
“A softer economic backdrop has turned small surpluses into small deficits — not a big deal from an economic standpoint,” he said. “The more meaningful update — and presumably larger deficits — will come as the government begins to roll out new policy measures.”
Based on the average forecasts by private-sector Canadian economists in early October, the government expects GDP growth of 1.2 per cent in 2015, down from two per cent in the Conservatives’ April 21 budget document. Next year output is likely to pick up by a rate of two per cent — although that’s still down from the previous federal estimate of 2.2 per cent.
Looking farther ahead, the Finance Department update shows increases of 2.2 per cent in both 2017 and 2018 — basically in line with budget estimates. In 2019, growth is expected to narrow slightly to two per cent — matching the Tories April forecast.
Also on Friday, the Finance Department projected a budget deficit of $3 billion in fiscal 2015-16 — a swing from a $2.4-billion surplus forecast in the Conservative’s budget.
In fiscal 2016-17, the deficit is now expected to grow to $3.9 billion, compared to a surplus of $2.7 billion in the April budget.
Deficits are anticipated to shrink over the following year, turning to surplus of $1.7 billion in 2019-20.