Federal Finance Minister Bill Morneau delivered on Prime Minister Justin Trudeau’s election promises in Tuesday’s federal budget, with the focus divided evenly between helping the middle class and building infrastructure, but with much higher deficits than the $10 billion originally envisioned.
Deficits are projected to be $29.4 in fiscal 2017, ending March 31, $29 billion in fiscal 2018; $22.8 billion in fiscal 2019, $17.7 billion in fiscal 2020 and $14.3 billion in fiscal 2021.This results in the federal debt rising to $732.5 billion by March 31, 2021 from $619.3 billion today.
These projections are based on the assumptions that Canada’s economy will grow at an average 1.9% to 2020; inflation is benign, at around the Bank of Canada’s target of 2%; interest rates gradually rise, with three-month treasury rates reaching 2.7% in 2020; and the unemployment falls gradually to 6.3%.
Externally, the budget assumes the U.S. grows at an average 2.3%, which should help Canadian exporters, and oil prices and the Canadian dollar increase slowly, to US$63 a barrel and to US83.1¢, respectively, by 2020.
To be on the safe side, the Department of Finance of Canada has reduced the revenue that can be expected by $6 billion a year to cover unexpected developments on the economic front, such as slower growth or lower oil prices. Thus, the projected deficit of $14.3 billion in 2020 could turn out to be $8.3 billion with the same growth profile.
There’s also upside risk. The budget document sates that the deficit could be as little as $400 million in fiscal 2021 if the economy is stronger than expected and grows by an average 2.5% during the next six years.
Given the deficit projections, the government will be repealing the federal Balanced Budget Act that was passed in June 2015, as it would have required balancing the budget in fiscal 2017.
What’s not clear is how this government plans to return to balanced budgets. The budget document states only that “the government will set a timeline for balancing the budget when growth is forecast to remain on a sustainably higher track.”
For now, the best that can be said is that the budget projects increases in program spending of just 1.3% in fiscal 2019, 1.9% in 2020 and 2.9% in 2021 vs an average increase of 6.3% in 2016-19 — but with no indication of how this spending restraint will be achieved.