Canada's Federal Finance Minister (and putative PM in waiting) Chrystia Freeland has spoken regularly about her commitment to fiscal responsibility. The Fall Economic Statement, released on Thursday, offered her a chance to put those words into practice. In the event, though far from irresponsible, it did not quite measure up.
The Federal Government has been expressing concern over the rising risk of a recession in 2023, and of course the media are (wrongly) convinced a recession has already begun. Rather than keeping its fiscal powder dry to deal with that recession if, as and when it happens, the Government has chosen to introduce a raft of new spending measures right away -- and these are not one-off measures. You can find a list here. The measures are targeted and individually modest in size, but nevertheless add up to new spending amounting to C$ 30 billion over the next five years. Tory Leader Pierre Poilievre is unimpressed and it is reasonable to assume that the Bank of Canada, which is trying hard to slow the economy down, is not best pleased either.
Rather than focusing on the individual spending measures, it is more useful to look at how the Government's economic and fiscal projections have evolved since the budget was tabled back in the Spring. This annex to the official release has all the data one could possibly want, and it leads to some surprising conclusions.
At budget time, the deficit for the 2022/23 fiscal year (roughly April-March) was forecast at C$ 52 billion. Data for the first five months of the fiscal year, released last week, showed the actual outcome was in fact a small surplus. In the absence of any new policy measures, Thursday's document states that the deficit for the full year would now be projected at C$ 23 billion, but -- and it's a big but -- the actual projection is C$36.4 billion! In addition to C$ 6.1 billion announced yesterday (part of that C$ 30 billion over five years referred to above), the statement casually slips in the fact that policy actions announced since the budget (but before this week) amount to a further C$ 7.3 billion. In effect, the Government intends to spend C$ 13 billion more than it announced just six months ago; to put it another way, it intends to spend almost half of the windfall represented by the difference between the initially projected deficit and the updated version. It is hard to see this as restraint.
An interesting twist in this statement is the publication of a detailed "downside scenario" for the economy and the budget, designed to show what might happen if the slowdown in the economy in 2023 is worse than suggested. For FY 2022/23 -- which, recall, is already half over -- the projected deficit balloons from the baseline C$ 36.4 billion to a startling C$ 49.1 billion. With so little of the fiscal year left and the economy conspicuously not yet in recession (see: October employment data), this seems highly unlikely, especially as the Government is continuing to benefit hugely from high energy prices, which show no sign of going away any time soon.
The deficit projections in the downside scenario remain above the base case throughout the customary five-year planning cycle, although they do fall gradually from a 2023/24 peak in excess of C$ 50 billion. Meantime in the base case, the deficit peaks in the current fiscal year and fall steadily thereafter, leading to -- wait for it -- a surplus of C$ 4.5 billion in FY 2027-28. This is the first time that the Trudeau Government, elected in 2015 on a promise to run small deficits for just a few years, has actually projected a surplus. It would be unwise to take it to the bank.
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