Some of the recent economic data, especially the startlingly weak November employment report, would seem to indicate that the Canadian economy is at risk of a downturn. Finance Minister Bill Morneau is unconcerned: unveiling the government's economic and fiscal update today, Morneau predicted that the Canadian economy would remain the second-fastest growing in the G7 this year and next. And he unveiled a sharply higher budget deficit for the current year, with only gradual reductions forecast for the five-year planning horizon.
The specific growth forecasts that Morneau is happy about are unimpressive: 1.7 percent this year and 1.6 percent in 2020. It may be true that this will place Canada second in the G7 growth table, but it is remarkable that the domestic economy is unable to keep pace with the economy of the United States, the best-performing economy in the G7 and Canada's largest trading partner by far.
The projected deficit for the current fiscal year (ending in March 2020) is now C$26.6 billion, up from just under $20 billion in the spring budget -- and almost twice as large as the final outcome of $14 billion in the previous fiscal year. To be fair to Morneau, this is not solely the result of a burst of new spending in the wake of the recent election. The government is booking almost $ 5 billion in public service pension costs as a result of persistently low interest rates, as well as $2 billion in costs relating to a new revenue sharing agreement for the Hibernia oil field offshore Newfoundland. The higher spending is only partially offset by a $1.7 billion increase in projected revenues.
As a result of the increased deficit this year, the debt-to-GDP ratio will edge up to 31.0 percent. This remains the lowest of any G7 member, as Morneau never tires of saying. Still, keeping this ratio on a downward track has been something of a shibboleth for this government, and it is mildly surprising to see that goal abandoned, however briefly. The deficit is forecast to edge higher in fiscal 2020-21, reaching $28.1 billion, before starting to decline in subsequent years, reaching a projected $11.6 billion in 2024-25. By that time the debt-to-GDP ratio is forecast to have fallen to 29 percent.
It's impossible for someone of my vintage to look at these projections and not think back to the fiscal dark ages in the 1980s. During that decade, governments regularly produced fiscal projections that showed chunky deficits for the near term, followed by significant improvements in the "out years". The chunky deficits always materialized; the later improvements never did. It was only when Finance Minister Paul Martin, in the early 1990s, effectively shortened the planning horizon to two years, that the government was finally able to control its spending and start reducing the deficit.
Martin's deficit cutting success was hugely assisted by the rapid growth posted by the US economy at the time. Morneau may not turn out to be so lucky, and if things do turn south for the Canadian economy, he may come to regret not giving himself a bit more wriggle room.
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