Trudeau government facing bigger baseline deficits amid weaker economy: PBO

The new Trudeau government will have to contend with bigger-than-expected baseline deficits in the coming years as it starts rolling out the large spending plans that helped it win power, the federal budget watchdog says.

OTTAWA — The new Trudeau government will have to contend with bigger-than-expected baseline deficits in the coming years as it starts rolling out the large spending plans that helped it win power, the federal budget watchdog says.

The parliamentary budget office downgraded its economic projections for Canada on Tuesday, blaming the gloomier forecast on weaker growth, low commodity prices and shrinking revenues.

“It is worse than what we had expected, but it is not a disaster,” assistant parliamentary budget officer Mostafa Askari said Tuesday of Canada’s economic outlook.

“It’s a pause in the economic growth and as a result we have seen some deterioration in the fiscal picture for the government.”

The updated figures released by the budget office suggest it will be tougher for the Liberals to fulfil their election promise to balance the books by 2019-20, a goal they have said will follow three years of deficits.

But even those annual shortfalls are on track to grow bigger than expected, the report said.

For example, the Liberals pledged to run deficits of no more than $10 billion in each of the next two years by basing their forecasts on calculations made by the parliamentary budget office in July.

The budget office crunched those July numbers by updating government projections from April’s budget by recalculating them using downgraded Bank of Canada growth forecasts.

The latest PBO numbers, however, suggest the government’s fiscal starting point will be billions of dollars lower in those two years — by $3.6 billion in 2016-17 and by $6.9 billion in 2017-18. By factoring in the Liberal spending pledges, it could mean deficits of more than $13 billion in 2016-17 and more than $16 billion in 2017-18.

The Liberals have also said they would run a $5.7-billion shortfall in 2018-19 before delivering a $1-billion surplus in 2019-20 — but those projections are based on a combination of April’s Finance Department forecasts and the party’s own predictions.

The budget office said its predictions Tuesday do not take into account the fiscal impact of any measures in the Liberal government’s election platform, which contains big-ticket spending promises on things like infrastructure. The Liberals expect the infrastructure commitment to kick-start the economy and create jobs.

John McCallum, a Liberal cabinet minister and former chief economist at the Royal Bank, said the weaker growth highlighted in Tuesday’s PBO report essentially endorses the party’s infrastructure pledge.

“That is not something to rejoice about, but it is something that underlines the need for the job-creating infrastructure investments,” McCallum said in Ottawa.

Conservative MP Tony Clement, whose party lost last month’s election after nearly a decade in office, said he wants the Liberals to explain how they will avoid running up bigger deficits than it they had promised.

Clement said he fears the government will attempt to make up for the shortfalls through tax hikes and cuts to public services.

The opposition New Democrats called on the government Tuesday to be more transparent and produce a fiscal update for the public before the end of the year.

Since taking power, the Trudeau government has yet to say whether it will release a fiscal update before it tables its first budget.

“The Liberals should be clear on what lies ahead for Canadians,” NDP MP Guy Caron said in a statement.

“Will they backtrack on their promises for change? Will they run a $14-billion deficit next year? Will they cut public services?”

The report Tuesday also updated the budget office’s own fiscal projections from April.

Back in April, the budget office said Ottawa would run a $1.1-billion surplus in 2015-16, break even in 2016-17 and post a $2.6-billion deficit in 2017-18. The spring forecast also projected shortfalls of $2.8 billion in 2018-19 and $2.5 billion in 2019-20.

The office is now forecasting a $1.2-billion surplus in 2015-16, but says it will be followed by four straight deficits that are on average $2.4 billion lower per year than its April projection.

It expects shortfalls of $3 billion in 2016-17, $4.7 billion in 2017-18, $5 billion in 2018-19 and $4.6 billion in 2019-20.

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