Finance Minister Bill Morneau said today that Canada’s budget is deeper in the red than we were told in the 2015 budget as the economy’s performance has disappointed. He also revised down the government’s outlook for the economy over the next year. According to the Minister, the federal books are short roughly $3 billion in the current fiscal year and $3.9 billion in 2016-17, with deficits continuing through 2018-19–a significantly gloomier fiscal picture than was painted by the Conservatives and even by the most recent report of the Parliamentary Budget Committee.
However, a large portion of this worsened outlook is because the Liberals chose to adjust down their forecasts of economic growth to levels well below the downwardly revised levels predicted by private-sector economists, effectively adding a contingency reserve.
This lower growth forecast adds C$1.5 billion to the projected deficit for 2015-16 and $3.0 billion for each of the five years from 2016-17 on.
Without that economic adjustment, the deficits would be $1.5 billion for 2015-16 and $3.0 billion for each of the five years from 2016-17 on. Nevertheless, all of these projections exclude the Liberals’ impending budgetary stimulus initiatives.
When quizzed by reporters, Morneau would not say whether he remained committed to no more than an annual budget deficit of no more than $10 billion over the next three years. He provided no specifics on exactly what the update portends for the upcoming budget—the timing of which was not released—but asserted that the government would stimulate the economy in a prudent manner.
Analysis
I agree that there are downside risks to the global and Canadian economies. Canada has suffered a severe blow with the dramatic and sustained fall in oil and other commodity prices, the impact of which has not yet been fully felt throughout the economy. Minister Morneau agreed that further reductions in employment and activity in the resource sector are coming in contrast to what the former government and the Bank of Canada have asserted.
Canada’s federal balance sheet is in great shape thanks to years of austerity beginning in the 1990s. Our structural deficit has been obliterated, helped by the secular decline in interest rates. Moreover, our debt-to-GDP ratio is barely above 30%, at the bottom of the Organization for Economic Cooperation and Development (OECD) countries performance. The proposed deficit of $10 billion is only 0.5% of Canadian GDP—an extremely low number by global standards, well-below the level in the U.S. of about 2.4%.
Canada’s economy is in need of fiscal stimulus. The risk is too little, too late—not, an overflow of red ink. The U.S. made of mistake of insufficient government stimulus in the aftermath of the financial crisis. Canada should not make the same mistake now.
We have been hard hit by external forces that have driven down a very important sector of our economy. The hard won gains on the fiscal front give us the bandwidth to now take significant action to reboot economic activity and to improve our productivity and competitiveness over the next decade. We should seize that opportunity, which will no doubt entail running budget deficits in the near term of more than $10 billion.
