DEFICIT SOARS TO $27 BILLION
More surprise red ink on the way
The federal deficit will balloon by an extra $7 billion over the next fiscal year, Finance Minister Bill Morneau said Monday, as the Conservatives warned that people were suffering under the Liberals’ handling of the economy.
The sharp rise in the deficit leaves the minority Liberal government in a worse financial position than expected early in its second mandate.
A prolonged downturn in the oil and gas sector is also weighing down on economic growth, Morneau said in a fiscal update.
“When producers face challenges — particularly those in Alberta and Saskatchewan — Canada’s entire economy feels the effect,” the fiscal report said.
Morneau later told reporters that “nobody said it was going to be easy” to bring the budget back into balance.
Pierre Poilievre, shadow finance minister, said in a statement that 71,000 Canadians lost their jobs last month and bankruptcies, insolvencies and defaults are increasing.
“Tens of thousands of Canadians have had to go home and tell their families that they lost their jobs right before Christmas. Now they are left facing the cold reality that their government has no plan to help get the country back to work in the New Year.
“Canada’s unemployment is above the G7 average and higher than the U.S., U.K., Japan and Germany, and the U.S. economy is outgrowing Canada’s by roughly 50 per cent. These are not statistics. People are suffering.
“Justin Trudeau is setting the stage for a madein-Canada recession.”
In the fall economic update, Finance Canada said the deficit would rise to $26.6 billion in 201920, up from an earlier projection of $19.8 billion. Between 2019 and 2024, deficits are expected to outpace projections by roughly $35 billion.
Ottawa also saw a slight rise in its federal debtto-GDP ratio, often cited as a crucial fiscal anchor by Morneau, from 30.8 per cent in 2018 up to 31 per cent.
A weaker balance sheet comes amid ongoing worries over a trade dispute between the U.S. and China, which has already slowed Canadian exports and business investment. Economic growth over the five years between 2019 and 2023 is expected to average 1.8 per cent, a level considered healthy but still below the Bank of Canada’s target rate of two per cent inflation.
Those lower levels of growth would carve out a very different economic picture for Prime Minister Justin Trudeau in his second session as leader, after enjoying growth rates that have at times exceeded three per cent.
Slower growth would add additional strain on a Liberal government that is expected to face pressure from smaller parties to boost funding on various social programs, including pharmacare and expanded social housing.
The widening deficit is partly the result of an accounting practice that links the perceived future value of public pensions to interest rates. When interest rates decline, the amount owing on pensions and disability liabilities effectively rises, in turn increasing the amount of money Ottawa needs to set aside every year to cover personnel expenses.
The cost against Ottawa will total $4.9 billion in its next budget, and could peak at $7.6 billion in 2021, according to Finance Canada projections.
A promised tax cut for middle-income earners will also cost the government $700 million in forgone revenues in 2020, the fiscal update said. Separate election promises made by Trudeau amounted to another $1.5 billion in unplanned expenses.
The deficit is now expected to peak at $28.1 billion in 2020, falling to $11.6 billion in 2025.
Canada’s federal debtto-GDP ratio, despite an expected rise this year, remains among the lowest in developed countries. Many economists have argued that Canada’s larger problem is its high levels of household debts, which are among the highest in developed nations after 10 years of very low interest rates.
Critics point out that Morneau has regularly missed deficit targets after promising in 2015 to run a $10-billion deficit that would be reduced to a surplus in 2019. The Liberals later abandoned any plans to return to balance.
“They’re almost certain to add far more debt than they ever promised during the most recent election, and they are now going to blow apart yet another deficit-related promise,” said Poilievre Monday.
After more than a year of trade concerns, Deputy Prime Minister Chrystia Freeland signalled last week that North American leaders were on the cusp of ratifying a modernized free trade deal.
Separately, the U.S. and China late last week came to limited agreement on trade that has eliminated some fears that the dispute would tip the economy into recession.
Doug Porter, chief economist at Bank of Montreal, said higher deficits might increase pressure on the Bank of Canada to act in the event of a downturn.
“If the federal government can’t offer much more on the fiscal front, the onus will fall more heavily on the bank, should the economy soften more than expected in 2020,” said Porter in a statement.