Deficits can't be here to stay: Former finance minister
Justin Trudeau is starting his second term in worse fiscal shape than expected, meaning Canada’s finances will likely be pushed further into the red.
The Parliamentary Budget Office downgraded its outlook for the Canadian economy on Thursday and now expects deficits to be a cumulative $9.5 billion larger by the end of 2025 than it had previously forecast.
The government agency, whose baseline estimates were used by political parties to cost their 2019 election platforms, said lower tax revenues and higher operating costs were the primary cause of the wider fiscal gap.
It’s a weaker starting point for the Liberals, who won a second -- albeit reduced -- mandate in the October vote. Trudeau’s team has been running deficits since it first ousted the more austere Conservatives in 2015, putting the money into enhanced family benefits, middle-class tax cuts and infrastructure. Trudeau doubled down on the strategy during this year’s campaign, pledging to increase deficits by $32 billion by 2024.
The budget watchdog revised the 2019 fiscal gap slightly wider to $21.1 billion, though it remains the same as previously forecast in 2020 at $23.3 billion. The biggest change to the deficit outlook is an expected $19 billion shortfall in 2021, from $15.4 billion previously. Thursday’s projections don’t include any of the new spending proposed during the campaign.
The PBO’s updated economic and fiscal outlook now sees Canada’s real gross domestic product rising 1.7 per cent in 2020 and 1.6 per cent in 2021, down from June estimates of 2.0 per cent and 1.8 per cent respectively. The downgrade reflects “increased trade tensions and related uncertainty,” according to the agency.
It also projects the Bank of Canada overnight rate to be 2.25 per cent by the end of 2020, implying several rate hikes over the next year. That runs counter to most market and economist expectations, with analysts surveyed by Bloomberg predicting the central bank will cut rates to 1.5 per cent from the current 1.75 per cent.