Deepening deficits weigh on Liberals

Trudeau’s spending vows add to pressure

OTTAWA • The deficit under Prime Minister Justin Trudeau is likely to deepen in coming years due to a slump in economic growth, further weakening the Liberal’s fiscal position as it seeks to juggle an incoming minority government.

On Thursday, the Parliamentary Budget Office said it expects budget deficits to be an average of $1.6 billion higher over the next five years, owing to growing fears over international trade disputes and lacklustre Canadian exports that are likely to shrink the Canadian economy. The increase does not include promises Trudeau made during the campaign, which will further nudge spending upward.

Higher deficits would put additional fiscal strain on the Trudeau government as it seeks to secure the support of the NDP, who has called for higher spending on pharmacare and social housing, among other programs.

A lowered economic outlook comes amid increasing concerns that a trade war between China and the U.S. could spill over into the Canadian economy, snarling exports and causing business investment to dry up. Lower public spending by the Alberta government was also cited by the PBO as a reason for the downgrade.

Many economists called on the Trudeau government to rein in fiscal spending in recent years, saying the effect of additional stimulus would be muted at a time when the economy is running close to capacity.

GDP growth is now expected to top out at 1.7 per cent in 2020, 0.3 per cent lower than the PBO’s earlier estimate in June 2019. GDP in 2021 is projected at 1.6 per cent, 0.2 per cent below its earlier projection. The deficit, meanwhile, is now expected to rise to $21.1 billion in 2020, peaking at $23.3 billion in 2021.

Trudeau took a sharp departure from other parties during the 2015 election campaign, promising to run an initial deficit of $10 billion as a way to boost the economy, then return back to balance by 2019. He later abandoned those plans, and ran higher-than-expected deficits even when the Canadian economy was growing close to three per cent, outpacing all other G7 countries. The deficit was $14 billion in the 2019 fiscal year.

Trudeau doubled down on that spending trajectory in the recent election,

OTTAWA CURRENTLY HAS NO PLAN TO RETURN TO BALANCE.

promising to further boost spending on tax credits for families, infrastructure and a limited pharmacare plan. Ottawa currently has no plan to return to balance, instead linking its fiscal prudence to a debt-to-GDP ratio that has continued to trend downward, mostly because of gradual economic growth.

But the PBO said in its report that numerous Trudeau campaign promises would also push spending higher than the current estimate, “reducing the probability of balancing the budget by 2024-25, as well as reducing the probability that the debtto-GDP ratio will be lower than 30.9 per cent in that year.”

Even so, it estimates that by 2025 there is a 70 per cent chance that the federal debtto-GDP ratio will be below its 2019 level of 30.9 per cent.