Liberal deficits could total $90B after 4 years: National Bank study

Prime Minister Justin Trudeau, right, goes face-to-face with Finance Minister Bill Morneau at Rideau Hall in Ottawa on Wednesday, November 4, 2015. (Sean Kilpatrick/THE CANADIAN PRESS)

OTTAWA -- The country's dampened economic prospects could put the Liberal government on pace for $90 billion in deficits over its four-year mandate, a new report said Wednesday.

Research by the National Bank of Canada predicts the public books will sink deeper into the red due to the combination of a hobbled economy and Liberal promises of billions in fiscal stimulus.

The report offers a look at the degree of pre-budget fiscal pressure on the new government, which faces the dilemma of juggling election vows with the reality of the fading economy. The Liberals' first budget is expected late next month.

"Repeated downgrades to the national growth outlook have ... dealt a heavy blow to the federal budget balance," wrote Warren Lovely, the bank's managing director of public sector research.

To help illustrate the impact of lowered expectations, Lovely said if the bank's worsening economic forecasts eventually unfold, then Ottawa could lose $50 billion in revenue over the next four years. He said the current environment of lower-than-expected interest rates will help offset the cost "a bit."

His $90-billion shortfall figure also accounts for Liberal electoral commitments, which he says amounted to $38 billion in new spending over four years.

The Liberals have promised to run deficits in the coming years in order to help them spend $17.4 billion over their first mandate on infrastructure projects. They predict the plan to create jobs and generate economic growth.

Since coming to power, however, the Liberals have shied away from their election vow to keep annual deficits under $10 billion as the economy continues to falter amid falling commodity prices.

The Liberals have also promised to balance the budget in the fourth year of their mandate -- a goal Lovely says will be difficult to accomplish without tax hikes or spending cuts.

In a December interview, Prime Minister Justin Trudeau insisted his pledge to balance the books in four years was "very" cast in stone. Trudeau also said he would live up to the other fiscal "anchor" of lowering the debt-to-GDP ratio in every year of its mandate.

Balancing the books will be a tougher task than lowering the debt-to-GDP ratio, which represents a government's capacity to pay back debt. Experts say by targeting debt-to-GDP, the Liberals can produce annual deficits of up to $25 billion in the coming years and still lower the ratio as long as the economy grows at a decent pace.

In his analysis, however, Lovely said at a certain point Ottawa may be forced to provide less fiscal stimulus to meet its debt-to-GDP goal.

He called such a scenario "unsavoury" because, like many experts, he argues the struggling economy needs a healthy dose of stimulus, as long as spending is done in a fiscally responsible manner.

Lovely estimates Ottawa's bottom line for 2016-17 has deteriorated by $15 billion compared to projections in last April's budget, delivered under the former Conservative government.

That figure has slipped about $9 billion since November alone, he added.

"We haven't exactly staunched the bleeding; if anything, it's continuing to pool up," Lovely wrote.

In releasing his fiscal update in November, Finance Minister Bill Morneau acknowledged that the poor economic situation meant the government's bottom line over its mandate was poised to be billions lower per year than outlined in last April's budget.