In a recent analysis, the Office of the Parliamentary Budget Officer revealed that Canada's federal fiscal deficit is expected to expand by a third, surpassing Finance Minister Chrystia Freeland's targeted level.
Budget Deficit Projection
The projected budget deficit for the current fiscal year ending March 31 is estimated to reach 46.8 billion Canadian dollars, equivalent to $35.5 billion. This represents a significant increase compared to the previous year's deficit of C$35.3 billion and would exceed the targeted C$40 billion set by Freeland. Despite her attempts to limit government spending to combat inflation, the deficit is expected to surpass the set limit.
Upcoming Budget Plan
Freeland is set to unveil her 2024 budget plan on April 16, outlining tax policies and spending priorities for the next 12 months.
Bank of Canada's Concern
Bank of Canada Governor Tiff Macklem has expressed concerns that excessive government spending could impede efforts to reduce inflation from the current 2.9% down to 2%. The central bank plays a crucial role in setting and maintaining the inflation rate at 2%, with economists anticipating a gradual reduction in rates starting in June.
Economic Outlook
The Office of the Parliamentary Budget Officer highlighted that economic growth in Canada is expected to remain subdued until 2024 due to high-interest rates, which have dampened consumer spending and housing activity. The combination of slower growth and increased expenses has contributed to the widened deficit projection for the upcoming fiscal year 2023-24.
Budget Deficit Projected to Decline Gradually
The watchdog forecasts a gradual decrease in the budget deficit, reaching around C$20 billion by the end of the decade. This prediction is based on the assumption that no new spending measures will be introduced, and existing temporary programs will be allowed to phase out.
Pressure on Liberal Government to Increase Spending
Canada's Liberal government is facing pressure to boost spending to expedite the construction of new homes, as there is a significant shortage of housing units compared to demand. Despite struggling in public-opinion polls, the Liberals have also rolled out a universal drug plan, expected to cost about C$1.5 billion annually. The final cost remains uncertain until agreements are reached with all provinces.
Rising Interest Rates Impact Federal Government's Debt-Service Ratio
Higher interest rates have elevated the federal government's debt-service ratio, which measures the amount of tax revenue required to meet obligations. The ratio is projected to rise to 10.2% for the 2023-24 fiscal year, a notable increase from 7.8% in the previous 12 months. The watchdog anticipates the ratio to continue climbing, averaging 10.7% through 2028-29, surpassing the pre-pandemic low of 7%.
Warning From Former Bank of Canada Governor
David Dodge, a former Bank of Canada governor, has cautioned that a sustainable cost-to-revenue ratio for the Canadian government should not exceed 10%.
Calls for Surtaxes and Spending Restraint
Lawmakers on the Canadian legislature's finance committee have recommended implementing surtaxes on corporate profits in the grocery and energy sectors to combat inflation driven by pricing behavior. On the other hand, the Business Council of Canada, representing CEOs of top companies, has advised against introducing new spending in the 2024 budget plan.
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