On Tuesday, Canada's Finance Minister Chrystia Freeland tabled the Government's Fall Economic and Fiscal Update. Briefly summarized, the update shows that the fiscal situation is somewhat more favourable than was projected in the 2021 budget back in the Spring -- and that fact, together with the recent worsening in the COVID outlook, is giving the Government cover for further spending increases.
Final figures for the 2020-21 fiscal year (which ended this past April) show a deficit of C$ 327 billion, materially lower than the C$ 354 billion estimated on budget day. The improvement is roughly equally attributable to higher-than-expected income tax revenues and lower program spending. For the current fiscal year, the projected deficit is C$ 144 billion, down from C$ 155 billion projected on budget day. It's worth noting, however, that without the package of new spending items announced in the update (under the clumsy umbrella of "Protecting our recovery by finishing the fight against COVID-19"), the deficit projection would have been closer to C$ 130 billion.
The deficit is projected to continue falling in medium term, hitting C$ 58 billion in 2022-23 and reaching C$ 13.1 billion by 2026-27. It need hardly be stated that the data for the "out years" of the forecast are little more than aspirational -- if even that. Still, one positive the Government can point to is that the debt/GDP ratio may fall rather faster than earlier expected. It is now projected to peak at 48.0 percent in the current fiscal year, down from 51.2 percent projected back on budget day, and should slip to about 45 percent by mid-decade.
Despite cries of anguish from opposition politicians (of which, more later), it is hard to be surprised by the tack the Government is taking here. For now it can project a falling deficit while still spending more money for the fight against COVID, including a C$ 4.6 billion contingency to deal with the omicron variant. The political calculus is that there is little appetite among voters for an early bout of austerity. Keep in mind that this is a minority Government, and recall that when Justin Trudeau was asked before the October election if he would commit to not calling an early election if he wound up with another minority, he simply said "Politics doesn't work like that". Until further notice, every decision and statement must be seen in a pre-election context.
Even though this is a mid-year fiscal update and not a budget, the opposition Conservatives are taking the opportunity to try to focus on their overriding theme du jour: inflation is Canada's biggest problem, and it's all Justin Trudeau's fault. The Tories' belligerent finance critic, Pierre Poilievre, was on his feet soon after Freeland completed her speech, reciting a formulation I have not heard in many years: Canada's current inflation spike is caused by "too much money chasing too few goods", and the reason there is too much money is, of course, Trudeau and Freeland's addiction to deficit spending.
So it's timely that this morning saw the release of the latest consumer price inflation data*, for the month of November. The numbers are not good, but they remain a whole lot better than what's happening south of the border. CPI rose 4.7 percent year-on-year, the same rate as was seen in October. All eight major sub-components of the index rose in the month, led by a 10 percent rise in transportation costs, mainly resulting from a 43 percent jump in gasoline prices. Excluding gasoline, CPI rose 3.6 percent in the year to November, matching the rise posted in October.
The month-on-month increase in CPI slipped to 0.2 percent, down from 0.7 percent in October. However, there was no evidence of any decline in the Bank of Canada's three preferred core inflation measures, so we will be waiting a while longer for any real evidence that the inflation spike is "transitory".
StatsCan has, shall we say, a rather more nuanced view of the causes of inflation than Pierre Poilievre does. As regards gasoline prices, it notes that "Oil production continues to remain below pre-pandemic levels, though global demand has increased". For grocery prices, which rose at the fastest pace in six years, it draws attention to "higher shipping costs and supply chain disruptions" as well as "poor crop yields resulting from unfavourable weather conditions". Not much that Trudeau and Freeland, not to mention the Bank of Canada, can do about any of that, but it would be unwise to hold your breath waiting for Poilievre to change his tune.
* Link to the website is not available at the time of writing because of cybersecurity concerns at StatsCan.
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