Oil Rout Puts Canada in C$3 Billion Hole as Trudeau Steps Up

Updated on
  • Morneau's update paints grimmer picture than Liberal platform
  • Outlook suggests planned spending will lead to deeper deficits

Canadian Finance Minister Bill Morneau released forecasts showing he’s inherited a much worse fiscal outlook than expected as the country’s finances take a big hit from the oil price slump.

A fiscal update released by the finance department showed Canada on pace for red ink even before newly elected Prime Minister Justin Trudeau kicks off his plan for deficit spending. The latest projections are for a C$3 billion ($2.3 billion) deficit in the fiscal year that began in March, compared with a C$1.4 billion surplus budgeted by former Finance Minister Joe Oliver.

To take into account growing risks to the outlook, Friday’s update -- which doesn’t reflect any new measures -- includes revenue assumptions that fall C$2 billion short of those used in the previous government’s April budget. It’s a more cautious outlook that suggests Trudeau will need to bring Canada deeper into deficit than he campaigned on, if his Liberals plan to move ahead with new stimulus spending aimed at kick-starting the stagnant economy.

“The simple truth is that the economy hasn’t performed as well as expected in the last budget,” Morneau told reporters Friday morning in Ottawa. He declined to say how the worsening outlook will affect his government’s ability to implement his party’s campaign pledges.

Red Ink Ahead

After a surplus of C$1.9 billion in the last fiscal year, the finance department projects a C$3 billion deficit in the fiscal year that began in March, followed by deficits of C$3.9 billion in 2016, C$2.4 billion in 2017 and C$1.4 billion in 2018. Canada is on track to run surpluses in 2019 and 2020.

The projections are also worse than those made by the Liberals in their platform for the Oct. 19 election, which included additional measures between 2016 and 2018 worth about C$25 billion.

“Higher spending is going to be something that will affect our children and grandchildren,” Conservative finance critic Lisa Raitt said Friday afternoon. “Given today’s fiscal update, is the government going to follow through on all the commitments in the platform?”

Erik Hertzberg/Bloomberg

Exaggerated Gap

Morneau said the figures suggest economic developments since April will result in an erosion of fiscal room of about C$6 billion annually over the next five years from what the previous government projected. Because he is making different assumptions about revenue, though, Morneau is exaggerating the gap between the last budget and Friday’s update by as much as C$3 billion, according to Bloomberg calculations.

“Incoming governments have typically started by announcing that the fiscal outlook left by their predecessor was worse than they had been led to believe,” Avery Shenfeld, chief economist at Canadian Imperial Bank of Commerce, said in a research note.

Crude oil -- one of Canada’s top exports -- has slumped about 47 percent in the past year amid speculation a surplus will persist as the Organization of Petroleum Exporting Countries continues to pump above its quota. Benchmark contracts for West Texas Intermediate dipped below $40 a barrel on the New York Mercantile Exchange this week for the first time since August.

The finance department assumes an average price for WTI of $49 in 2015 and $54 in 2016. It also lowered its projections for growth in gross domestic product to 1.2 percent in 2015 and 2 percent in 2016.