Canada's fiscal update

A few posts ago ("A legacy of deficits"), I noted that the Parliamentary Budget Office (PBO) had issued a report indicating that the fiscal surpluses that the Harper Tories had made a big part of their re-election campaign were entirely fictitious. Today, new Finance Minister Bill Morneau has released a fiscal update that confirms this.

The Tories had claimed that the budget for fiscal 2015/16 would show a surplus of $2.3 billion; now, it appears that there will be a deficit of $3 billion. Reflecting a lower medium-term growth outlook, small deficits are expected to continue until 2019/20 -- which means, if nothing changes, that the budget will remain in deficit right through the lifetime of current Parliament.

If the Tories are ashamed of this legacy, and of the lies they told about the fiscal outlook during the election campaign, they're not showing it. The party's new finance critic, Lisa Raitt, has immediately accused the Liberals of putting some of their planned spending into the numbers in order to make them look worse. There may be a small element of truth to this -- the PBO forecast a deficit of $1.2 billion rather than the $ 3 billion in today's update. Like the new Finance Minister, however, the PBO was forecasting a multi-year string of deficits rather than the surpluses promised by the Tories, so the actual size of the shortfalls is arguably not the real issue here.

It remains to be seen whether Morneau will allow the worsened base-case outlook to affect the new government's fiscal plans. The Liberals promised to run small deficits, about $10 billion per year, in an effort to stimulate the economy.  Morneau made it clear today that the general direction remains intact -- "it's just not possible to cut our way to prosperity" --  but we will have to wait for a full budget, early in the new year, to see whether these deficits will be added onto the baseline projections, or scaled back slightly to avoid too much red ink.  As the economics department at TD Bank points out, even if the Liberals add the full $10 billion to the baseline deficit projection, the resulting annual deficits would still amount to only 0.7 percent of GDP -- far lower than in the US, the UK, Japan and most other developed nations.

The anti-deficit rhetoric of the Harper Tories, regardless of their own very poor fiscal record, is likely to return to fever pitch no matter what the Liberals announce at budget time. In truth, however, a better question might be this: is a 0.7 percent deficit enough to make a real difference to the growth outlook, or should the government consider doing more while financing is so cheap?