Canada’s Deficit Outlook Darkens as Budget Watchdog Issues Warning
Ottawa — A revised forecast from the Parliamentary Budget Office (PBO) indicates that Canada’s federal budget deficits are poised to deepen significantly over the next five years, driven by a deteriorating economic outlook and the impact of campaign promises made by the Liberal government. The PBO’s assessment, released Thursday, predicts an average deficit of $1.6 billion higher than previously estimated, primarily due to escalating concerns surrounding international trade disputes, particularly the ongoing tensions between the United States and China, and a reluctance of the Canadian economy to fully realize its potential. The forecast does not incorporate the specific spending commitments made by the Liberal Party during the recent federal election campaign, which, if implemented, would further elevate budgetary expenditures.
The PBO’s revised projections detail an increasingly challenging financial landscape for the Trudeau government. The initial projection had anticipated deficits peaking at approximately $23.3 billion in 2021. However, the new assessment now forecasts these deficits to reach $21.1 billion in 2020, with a projected peak of $23.3 billion in 2021. These figures represent a substantial increase and have prompted scrutiny regarding the government’s fiscal strategy. The lower growth estimates also present significant challenges, particularly with regards to the government’s long-term debt commitments.
Several key factors contribute to the downgraded economic outlook. The escalating trade war between the U.S. and China continues to exert pressure on global trade, impacting the Canadian export market. In September, U.S. President Donald Trump announced a 15 per cent tariff on approximately $110 billion in Chinese imports, and further tariffs are slated for mid-December, placing nearly all goods from China under a 15 per cent tariff. The Chinese government is expected to retaliate with tariffs on U.S. imports, potentially escalating tensions. Furthermore, concerns about broader global economic conditions, including central banks cutting interest rates to stimulate growth, have added to the uncertainty. The Bank of Canada has so far resisted cuts, maintaining its current interest rate of 1.75 per cent, though the PBO anticipates a possible increase in rates during the second half of 2020 should the trade tensions ease.
Adding to the economic headwinds is the ongoing economic slowdown in Alberta, with the provincial government also reducing public spending, a factor further acknowledged by the PBO. This, coupled with concerns over diminished Canadian exports, paints a picture of a weakening economic foundation, impacting the government’s ability to generate sufficient tax revenue. The PBO’s projections take into consideration the reduced growth forecasts: GDP is anticipated to top out at 1.7 per cent in 2020, a 0.3 per cent decrease compared to its June 2019 projection, and further declines to 1.6 per cent in 2021, 0.2 per cent lower than the previous estimate.
The government’s spending commitments during the election campaign, including tax credits for families, investments in infrastructure and a limited pharmacare plan, are expected to further fuel the deficits, reducing the probability of achieving a balanced budget by 2024-25 and pushing the debt-to-GDP ratio below 30.9 per cent in that year by a margin of 70 per cent. Despite these concerns, the PBO’s assessment indicates that there is a 70 per cent chance of the federal debt-to-GDP ratio remaining below its 2019 level of 30.9 per cent.
The Liberal government had campaigned on promises of running initial deficits of $10 billion to stimulate the economy and subsequently returning to balance by 2019, a plan that was abandoned when the economy continued to grow at a rapid pace. The recent election campaign reinforced the government’s commitment to increased spending across several key areas. However, the PBO’s analysis suggests that the combined effect of these commitments will substantially elevate deficits, presenting a significant fiscal challenge for the government.
The PBO estimates that the government’s increasing spending is likely to result in a reduction in the probability of achieving a balanced budget by 2024-25, as well as reducing the probability that the debt-to-GDP ratio will be lower than 30.9 per cent in that year. Despite this, it still indicates that by 2025 there is a 70 per cent chance the government can maintain its debt-to-GDP ratio below the 2019 level of 30.9 per cent.
The combination of escalating trade tensions, a weakening economic outlook, and the government’s spending commitments underscores the significant financial challenges ahead for the Trudeau government. Navigating this difficult landscape will require a careful and strategic approach to fiscal policy.
