Federal deficit set to remain higher than estimated, economic update shows
OTTAWA -- The Liberal government’s first update on the state of the economy since the federal election shows the federal deficit is rising, while Canada’s debt-to-GDP ratio remains the lowest in the G7.
The latest look at the government’s books projects the federal deficit at $26.6 billion in 2019-20, up from the $19.8 billion projected in the 2019 federal budget.
The deficit is then projected to rise to $28.1 billion in 2020-21, which is higher than the $27.4 billion the Liberal Party estimated it would be in its 2019 reelection platform.
While no new spending measures have been announced in Monday’s economic update, the realities of the minority parliament and pressures to spend more from the opposition parties and the provinces are expected to result in a deeper deficit come the next federal budget, economist Fred O’Riordan, national leader in tax policy at Ernst and Young, told CTV News.
“There will be a lot of pressures on this minority government to increase expenditures and so that net debt-to-GDP ratio may not trend down, it may slightly trend up and it also depends on economic conditions,” he said.
The fiscal update also cautions about “fundamental structural shifts” taking place in the global economy leading to lower growth, but offers little on Canada’s specific plans to guard against or prepare for what some economists say could be a coming recession.
Asked about how the government’s plan will balance these rising economic concerns and calls to save for a rainy day with their spending and tax incentive approach, Morneau said the Liberals plan to manage spending in the coming years, while collaborating with the other parties on high-priced promises like pharmacare and tax breaks for the middle class.
“Nobody said it was going to be easy. Our challenge will be to continue to grow the economy and make sure that we have the capacity to make the investments that we want to make,” Morneau said.
Canada’s debt-to-GDP ratio is projected to remain on track to reduce incrementally over the next five years, from 30.9 per cent over the next two years, to 28.5 per cent in 2024-25.
The government says that “economic and fiscal developments” are largely behind the increased debt from what was projected, citing a change in how federal employee pension and benefits are calculated as the main cause. Policy actions taken since the 2019 federal budget are also a factor, including rolling in the gradual increase to the basic personal income amount.
The status update on the state of the economy from Finance Canada cites “challenging global conditions” and “temporary weakness” in Canada’s natural resource sector while touting that the country is on track to be the second fasted growing economy in the G7 in the year ahead, behind the U.S.
Once again, the Liberals point to Canada’s debt-to-GDP ratio and job creation numbers as the rosier economic indicators.
On the eve of Morneau’s meeting with his provincial counterparts, the update also makes reference to the reality that the benefits of Canada’s growth are not spread evenly across the country, leading to regional economic challenges.
Morneau said that the government does “see a level of anxiety among Canadians and that’s why we are looking forward to putting in place the program we talked about during our electoral campaign, we’ve started already.”
The Liberals have also announced their intention to follow through on a promise to launch a review of government spending and tax expenditures that they say will uncover some $1.5 billion in savings annually, starting in 2020-21.
They will also be looking into a new transparency reporting measure to reflect the deficit in a way that indicates how much of the debt is attributable to the government’s obligations in things like public sector pensions and benefits, versus debt created because of government-specific spending measures.
“We want to make sure that people understand the financial numbers we present… That requires us to consider whether we should add an additional line for further information that would enable us to present our numbers so that you can see how changes in interest rates impact our pension liabilities,” Morneau said, adding that they plan to consult experts on this approach before enacting it.
The update also notes that the ratification of the new NAFTA deal and the implementation of previously introduced tax incentives will help boost investment in Canada going forward.
“Well now we know why they didn’t want to introduce this update in the House of Commons,” said Conservative finance critic Pierre Poilievre off the top of his post-announcement press conference.
The Conservatives had called for the Liberals to present this economic status update while MPs were still sitting, but Parliament adjourned last week and isn’t set to sit again until weeks into 2020.
“What are we getting for all this debt?” he asked, going on to say that Canada is facing the prospect of a “made-in-Canada recession.”
“It is time to unleash our economy… to unleash the free market system so that businesses can grow and prosper so that our workers can be rewarded for their work and our economy can relaunch to its rightful place at the head of the pack,” Poilievre said.
Bloc Quebecois finance critic Gabriel Ste-Marie said that while his party is concerned about the size of the deficit, he is looking ahead to the Liberals’ promised tax on web giants that is set to bring in more revenue. In their reelection platform the Liberals committed to “making multinational tech giants pay their fair share” with a new three per cent tax on the income of businesses in the digital economy sector. It would come into effect on April 1, 2020 and target advertising and digital companies like Netflix, Apple, Google or Amazon, with worldwide revenues of at least $1 billion and Canadian revenues of more than $40 million.
The Liberals estimated during the campaign that this would bring in $540 million in 2020-21, rising to $730 million by 2023-32.