State of federal finances worse than previously thought
The latest federal budget showed that public finances are in poor shape and Ottawa is ill-prepared for a possible economic recession. But a recent Parliamentary Budget Office report suggests the situation may be worse than the government claims. According to the PBO, the government’s operating deficits are likely to be higher than the government expects.
For this year (2018/19), the PBO projects a deficit of $22.1 billion—$4 billion more than the $18.1 billion deficit projected by the government. Next year (2019/20), which is notable because it’s the year Prime Minister Justin Trudeau promised to balance the budget during the 2015 election, the PBO projects a $21.4 billion deficit for 2019/20 compared to a $17.5 billion deficit projected by the government.
Overall, the PBO projects a cumulative deficit of $85.6 billion over the next five years (2018/19-2022/23)—$7 billion more than the cumulative deficit projected by the government ($78.6 billion).
Critically, however, the PBO’s revised deficit estimates assume the Canadian economy continues to grow. This may not happen. There’s a very real possibility of an economic recession in the coming years given the last one was nearly a decade ago. A recession would result in even larger deficits by causing revenues to fall and certain types of spending (such as employment insurance) to automatically increase.
This could spur a vicious cycle characterized by persistent and growing deficits, increasing government debt, and rising interest payments—something Canada experienced in the 1970s, 1980s and early 1990s. In other words, prolonged deficits during periods of economic growth expose federal finances to significant risk, if an economic recession occurs.
The PBO also identifies a self-inflected drag on Canada’s economy created by federally-imposed carbon-pricing. The PBO estimates the economy will lose out on $10 billion of growth by 2022 due to carbon-pricing—that’s 0.5 per cent of GDP. The potential reduction in economic growth would be even larger over a longer period.
The federal budget tabled in February made it clear the government is not prepared for a recession; the PBO’s recent projections make matters even worse.
Subscribe to the Fraser Institute
Get the latest news from the Fraser Institute on the latest research studies, news and events.