Ottawa’s deficit forecast balloons to $18.4 billion: What the economists say

The federal Liberal government is projecting a deficit of at least $18.4 billion next year, nearly five times its $3.9-billion projection just 3 months ago, it was revealed today.

That means the shortfall may exceed $20 billion when a number of big-ticket Liberal campaign promises are factored in.

So that’s the third fiscal benchmark the Libs have blown through, following the $10-bil cap, and also the balanced budget by 2010-20.

– Andrew Coyne (@acoyne) February 22, 2016

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The federal Finance Department can also be predicting a $15.5-billion deficit in 2017-18 – a lot more than six times its estimate last fall of $2.4 billion.

The estimates released Monday don’t include billions of dollars in Liberal spending commitments that are expected in the upcoming federal budget, for example infrastructure investments.

Related

Federal budget coming March 22 – having a deficit that will likely surpass $20 billion

Here’s exactly what the economists say:

 

Douglas Porter and Robert Kavcic, BMO Capital Markets

Canadian Finance Minister Morneau announced that the Federal budget will be tabled March 22nd, and provided an up-to-date look at the fiscal situation. Ottawa is now taking a look at an $18.4 billion deficit for that upcoming fiscal year (FY16/17), but that could reach up to $30 billion on budget day. Note that this includes a level larger contingency than Ottawa was using in past projections, of roughly $6 billion each year (previously $3 billion). Also, we’ve assumed additional stimulus of roughly $10 billion in year 1, as in the election platform, can make its distance to the fiscal year starting April 1st. The updated outlook now also suggests a deficit of roughly $26 billion in FY17/18, however the underlying shortfall in every of the two upcoming years might be $6 billion smaller when the economy performs not surprisingly, and that’s permitted to flow to the main point here.
 
We fully agree that the moderate dose of stimulus is an entirely appropriate reaction to current economic realities, but we would counsel caution in minding the dosage, for two distinct reasons: 1) The growth restraints on Canada turn to be structural in nature (a reset lower on commodity prices), and not a short-term cyclical phenomena that may be countered with a quick fiscal boost, and a pair of) an overly aggressive fiscal boost could do lasting harm to Canada’s finances, casting doubt around the country’s hard-won triple-A credit rating.

Avery Shenfeld, CIBC Economics

Finance Minister Morneau’ s updated picture from the economic backdrop heading into this year’s budget isn’t pretty, but that is not news to anyone who has followed the deterioration in private sector forecasts. The 2016 real GDP forecast sits at 1.4%, nearly in line with our projection, but that’s down from 2% assumed in the November 2015 mid-year update, and nominal GDP has seen a deterioration because of the lower track for oil.

Finance Minister Morneau’s updated picture from the economic backdrop heading into the 2010 budget isn’t pretty

The outcome is that before applying new measures within the budget, the status-quo fiscal outlook could be for any deficit of $18.4 bn, in contrast to a November estimate of $3.9 bn (and a surplus of $2.7 bn assumed for the coming year in the spring 2015 Budget). Observe that the Liberal’s campaign pledge to run a $10 bn deficit was keyed off of that $2.7 bn surplus estimate for the status quo. Since that base case has deteriorated with a total of $21 bn, keeping the planned stimulus in place would now mean a deficit of roughly $30 bn. That’s still only one ?% of GDP, hardly a blow-up. The only question is if the modest dose of stimulus pledged within the campaign (roughly a half-percent of GDP) is sufficient to counter the continue the economy from low commodity prices.



BofA Merrill Lynch Global Research



With Morneau stating that it’s “difficult” to balance the budget by 2019-2020, we expect a long duration of large deficits.

The main driver of the budget is a weaker profile for growth, with GDP growth slashed to at least one.4% this season from 2.0% assumed previously. The deficit shortfall includes the impact of recent tax measures announced in December, although infrastructure stimulus impacts aren’t considered. New infrastructure spending, that could total $5B in 2016, might trigger a level larger deficit. Once we have argued, the federal government has room for roughly $30B in deficit spending this year if they desire to contain the net-debt-to-GDP ratio constant. Thus, even though the government has less room for additional stimulus measures, because of the weaker deficit starting place, we think there’s still some room to surprise to the upside in accordance with campaign promises.

For Bank of Canada policy, the implication is apparent: an adaptable, stimulus-ready Federal government takes pressure off of monetary policy as the sole driver of growth. Thus, we reiterate our view the BoC will remain on hold in 2016 despite weak economic growth. We have seen no rate hikes or cuts over our forecast horizon.

@VassyKapelos #politiciansansweringquestion #hastagmissed

– Kevin MacDonald CMA (@k_macd11) February 22, 2016

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With files from Canadian Press