Just a small deficit

Canada's Department of Finance has released its Annual Financial Report, and at least on the surface, it's mostly good news.  The Federal deficit for the year to March 2017 was C$ 17.8 billion, far higher than the $ 1 billion shortfall in the preceding fiscal year but markedly lower than the $23.0 billion projected in the budget back in February.

The way in which the smaller-than-expected deficit was reached is a little confusing. Revenues actually fell by $ 2 billion (less than 1 percent) from the preceding year, but the shortfall was smaller than had been expected at budget time. Program spending increased by more than 5 percent,  well above the rate of inflation, but this was less than had been budgeted.  Lastly, public debt service charges were slightly lower than budgeted because interest rates remained lower than the Department of Finance had projected.

It is unlikely that the smaller-than-expected deficit for the Government's first full fiscal year will be repeated in the near term. The Trudeau government has intentionally set out on a fiscal path that aims to stimulate the economy through a multi-year pattern of deficit spending. While the strong economy may keep revenues buoyant for much of the current fiscal year, program spending is unlikely to remain below target.  The Financial Report notes that much of the shortfall in spending in the year to March reflected slow disbursement of infrastructure transfers to Provinces and municipalities. Infrastructure investment was a major plank in the Liberal election platform, and it is very likely that the Government will do everything it can to get the money out the door more effectively from now on.

Is the prospect of continuing deficits anything to worry about?  The Department of Finance doesn't want you to think so. Page 10 of the linked report has a graph showing deficits as a percentage of GDP over a three-decade stretch.  The 2016-17 shortfall equates to just 0.9 percent of GDP.  This is certainly way smaller than the 4-5 percent shortfalls routinely seen at the start of the 1990s, a period of insanity that we can hope no-one in Ottawa wishes to repeat.  

Perhaps more pertinently, the Financial Report notes that the net debt of the entire public sector stands at just 27 percent of GDP.  This is by far the lowest in the G-7 -- indeed the average for that group is apparently 83 percent, though this is heavily influenced by the outsized debt of Japan and, to a lesser extent, Italy.  In truth, Canada's fiscal position is not a major cause for concern, but it would be a huge surprise if we don't start to hear the opposition decrying Trudeau's "financial irresponsibility" as we start to head towards, oh joy, the 2019* general election.

* Originally I stated wrongly that the Federal vote would be in 2018. We already have the tantalizing prospect of Provincial and municipal elections next year, so the trifecta of adding in the Feds as well would have been altogether too much!