A bleaker-than-expected economic outlook released this week may hamper the new Liberal government’s ability to fulfill its fiscal promises, but experts say it’s far from a disaster.
The Parliamentary Budget Officer — responsible for providing non-partisan financial analysis — unveiled new economic projections on Tuesday, and the forecast was cloudy with a strong chance of deficits.
Outgoing finance minister Oliver hopes successor keeps deficits down
Ottawa facing deeper deficits: budget office
While Prime Minister Justin Trudeau ran on a pledge to run “modest” deficits of no more than $10 billion over the next three years, the budget watchdog is now projecting that if they keep all their commitments, the Liberals could easily fall more than $10 billion into the red annually.
Returning to balanced books by 2019-20, as Trudeau promised, may also be much harder than expected.
“If they maintain the plan they have announced, then based on our forecast it would be difficult to reach a balance in 2019-20,” said assistant parliamentary budget officer Mostafa Askari.
But both Askari and other experts in the field were adamant that even a deficit of between $10 and $15 billion represents an extremely small slice of the national gross domestic product — about 0.7 or 0.8 per cent.
Canada’s debt-to-GDP ratio, a reflection of how effectively the country is paying back debt, is also expected to drop over the next five years, a sign that the country is doing alright financially.
“It’s not a disaster,” Askari told reporters.
Stephen Tapp, a former PBO and Bank of Canada economist who now works for the Institute for Research on Public Policy, echoed that sentiment. The Liberals are starting further back than they had predicted, he explained, with deficits likely to come in at around $11 to $16 billion in each of the next four years. Still, that that shouldn’t require them to rip up their platform.
“If I were involved in advising the Liberal economic platform, I’d say ‘Well, does this require a big rethink or a big shift?’ I think it’s not great news … but I don’t think it fundamentally alters what they should be doing.”
If the Liberals are serious about getting back to balance on time, said Tapp, then they have “a little bit more work to do than they would have thought during the election campaign.”
It appears that the new government will indeed try and stay the course. Finance Minister Bill Morneau said Canadians can expect a fiscal update by the end of the calendar year.
“We were, and continue to be, concerned with the state of the economy,” he added. “It’s good to be able to see what the Parliamentary Budget Officer put out.”
Exiting a meeting on Tuesday morning, Immigration, Refugees and Citizenship Minister John McCallum said the PBO forecast “isn’t something to rejoice about,” but it does reinforce the need for investments in infrastructure.
“What this news (does) is endorses the Liberal platform,” McCallum said.
McCallum said that his government has made a commitment about the size of deficits, and “we will be sticking to that commitment.” He did not elaborate.
READ MORE: Ottawa facing deeper deficits: budget office
According to Conservative MP Tony Clement, a former president of the Treasury Board, the Liberals now have some “difficult decisions” to make. They may choose to accept higher-than-expected deficits, he predicted, or they could raise taxes or cut services to compensate.
“None of those are palatable, but they really do have to come clean about what direction they’re going in,” Clement said.
“We need to know what that plan is. And our job as a responsible Opposition is to ask those questions.”
Tuesday’s bleak fiscal outlook is largely being blamed on a slower-than-predicted economic recovery. The US economy is not growing as fast as forecast and emerging economies like China are stagnating, PBO officials explained, which has led to a dip in the price of oil and several other commodities.