Finance Minister Bill Morneau’s updated picture of the economic backdrop heading into this year’s budget isn’t pretty, says CIBC chief economist Avery Shenfeld in a research note.
This morning, Morneau gave an economic update at a townhall event in Ottawa, as part of his pre-budget consultations. He announced the 2016 federal budget will be released on March 22 and that it will be the first major step in enacting a new direction and economic plan.
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But, Morneau also revealed the Liberal government is now projecting a deficit of at least $18.4 billion next year, which is nearly five times its $3.9-billion projection just three months ago. This means the shortfall could well exceed $20 billion, once a number of big-ticket Liberal campaign promises are factored in. The federal Finance Department is also predicting a $15.5-billion deficit in 2017-18, which is 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, such as infrastructure investments. But, the Liberals are banking on some of their spending vows to help revive economic growth and create jobs in Canada’s struggling economy.
Shenfeld says, “The only question [now] is whether the modest dose of stimulus pledged in the campaign (roughly a half-percent of GDP) is enough to counter the drag on the economy from low commodity prices.”
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Today’s calculations are based on an average projected oil price of $40 for 2016, down from $54 in the government’s fall update, and projected growth of 1.4%, down from 2% in the fall.
Finance says the fiscal projections are about $2 billion lower per year because recent developments have been accounted for, including the Liberals’ changes to the income-tax brackets and Canada’s operations in the Middle East.
Ottawa also adjusted its deficit forecast for 2015-16, and a shortfall is now projected to be $2.3 billion rather than the previous estimate of $3 billion.
The government traditionally bases its fiscal predictions on the average forecasts of private-sector economists, whom Finance Minister Bill Morneau met earlier this month. The government says the fiscal downgrades are largely due to the combination of lower oil prices and weaker-than-expected growth in the U.S. and other world economies.
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This release, less extensive than the government’s annual fall updates, comes amid numerous downgraded growth forecasts for Canada, which has been hit particularly hard by the steep slide in oil prices.
In support of the new, long-term economic plan for Canada, Morneau also announced the appointment of Dominic Barton, global managing director of McKinsey & Company, as the chair of the new advisory council on economic growth. This council, which will be selected shortly, will provide advice on policy actions to help create conditions for economic growth, with a focus on the middle class.
Morneau is also scheduled to appear Tuesday before the House of Commons finance committee. It’s expected he will argue that, given the circumstances, it’s more important than ever for the Liberal government to invest in the economy as a way to promote growth and help the country’s so-called middle class.
Also, he may note that Prime Minister Justin Trudeau recently acknowledged the Liberals would no longer fulfil their promise to keep the 2016-17 deficit under $10 billion. Trudeau also cast doubt on whether he would make good on his vow to balance the books within his four-year mandate. This was a headline pledge in the Liberal election platform.
Trudeau’s government has instead been emphasizing its other key promise to continue lowering Canada’s debt-to-GDP ratio during its mandate. Experts have said Ottawa could run annual deficits as high as $25 billion and still shrink that ratio.
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