Don’t Worry About Canada’s Budget Deficit Path

“Bill Morneau has been finance minister for all of a year, but he’s learned pretty quickly to deal with economic disappointment. Over the course of a single budget and two fiscal updates, Canada’s Liberal government has witnessed firsthand the fiscal fallout that attends subpar growth and lukewarm inflation. Although hardly unique to Canada’s sovereign, a lower and flatter trajectory for nominal GDP has robbed the government of hoped-for revenue. Importantly, the sizeable amount of prudence set aside in Budget 2016 (fully $6 billion per year) has been called on to blunt the impact on the budget balance…Factoring in efforts to revitalize a moribund national economy, the budget shortfall is now pegged at $25.1 billion for 2016-17, peaking at $27.8 billion one year later.” (National Bank Fiscal Update, Nov. 1, 2016)

As one can see in the following table containing the budget projections from the Department of Finance, the Canadian government has eliminated the $6 billion contingency fund for 2016-17 which in plain terms reduced its budget deficit estimates by an equal amount.

The deterioration of Canada’s fiscal position was primarily due to the downward revision to the economic outlook used in the latest Fiscal Update. The Canadian government uses an average of private sector economic forecasts as input into its own budget projections. The key influence of these economic projections is that they affect projected government revenues and expenditures.

The latest projected real GDP growth rates for Canada are very slow, 1.2% in 2016 and 2% in 2017. Economic growth in each year was lowered by 0.2% from earlier projections. Canada’s economic growth projections were lowered even further in subsequent years to only 1.8 % between 2018 and 2020. 

The reduction in economic growth from the previous estimates worsened the budget deficit picture by $1.3 billion in 2016–17, $3.9 billion in 2017–18 and by about $6.4 billion in each of the following three years.

The current budget deficit projections are $25.1 billion in fiscal 2016-17, $27.8 billion in 17-18, and $25.9 billion in 18-19. 

Despite the fact that there are no signs of a balanced budget in the forecast horizon, the market should still focus on the fact that Canada’s projected budget deficits are only about 1.2% or 1.3% of nominal GDP.

In other words, by G7 standards this is an enviable record. Don’t worry about Canada’s budget deficit. 

 

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Currency Trader 8 years ago Member's comment

Certainly reassuring, thanks.