CANADA

Federal deficit expected to be far smaller than forecast: PBO

WAY TO DISAPOINT TORY OPPOSITION

Ian Vandaelle, BNN Bloomberg

Oct 13, 2022

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Canada’s budget watchdog says the federal deficit will likely come in well below Ottawa’s previous forecast, absent new spending.

In a report Thursday, the Parliamentary Budget Officer said it projects the federal deficit will be $25.8 billion in fiscal 2022-23, less than half of the $52.8 billion forecast in the federal budget earlier this year.

The PBO said it expects further improvements for Ottawa’s books through its forecast horizon, with the deficit falling to $3.1 billion – or 0.1 per cent of gross domestic product – in fiscal 2027-28.

While that forecast would have the federal debt-to-GDP ratio, considered one of Ottawa’s fiscal anchors, falling from its 2020-21 peak of 47.5 per cent to 36.2 per cent, it would remain above pre-pandemic levels.

However, Parliamentary Budget Officer Yves Giroux said there are downside risks for the domestic economy and federal finances as rising rates hamper overall economic output.

“With the synchronized tightening of monetary policy by major central banks around the world to reduce high inflation, there is a risk of a more severe global slowdown, which would negatively affect the Canadian economy and federal finances,” he said.

The PBO expects that it will take more than a year for growth to rebound, as consumers tighten their budgets in the face of higher borrowing costs and concerns over recessionary risks.

“Following a strong performance in the first half, with the tightening of monetary policy, growth in the Canadian economy slowed considerably in the second half of 2022 as consumer spending downshifts and residential investment continues to decline. We project real GDP growth to remain weak through 2023 before rebounding somewhat in 2024,” Giroux said.

While the Bank of Canada has increased its benchmark rate by three percentage points from its pandemic trough of 0.25 per cent – into so-called restrictive territory, where rates ultimately constrict economic growth – the PBO said it expects the central bank will take its foot off the gas once there are signs inflation is coming back to target, and will reduce the benchmark rate to 2.5 per cent by the end of 2024.