Trudeau Set to Tap Canada Budget Reserves Amid Dismal Growthby
Government preparing for next budget as outlook deteriorates
Latest projections show C$50 billion less output over 2 years
Canadian Prime Minister Justin Trudeau’s fiscal leeway is shrinking just as demands for spending are beginning to mount.
The finance department has completed its latest survey of private sector economists and the numbers paint a worsening picture for national income and revenue. Compared with forecasts they gave for the March budget, the economists project almost C$50 billion ($38 billion) less in nominal output -- the best indicator of revenue -- over the next two years. That’s a markdown of more than 1 percent off Canada’s C$2 trillion economy.
A weakening revenue outlook means budget reserves are being eroded quickly and Trudeau’s finance minister, Bill Morneau, won’t have much wiggle room to accommodate calls for more funding for things like infrastructure -- or requests for additional spending from cabinet colleagues or provinces -- without running even higher deficits. Morneau’s department has already begun work on next year’s budget due sometime early in 2017, while an update of the 2016 plan is expected in November.
“Since the last budget we’ve seen income growth coming in that’s softer than expected at the time of the 2016 budget,” said Craig Alexander, chief economist at the Conference Board of Canada and one of the survey contributors. “This will have an impact on tax revenue growth.”
While the department declined to provide the results of its survey, Bloomberg News gathered forecasts independently from 10 of the banks and research groups that took part.
Pressure to increase spending is beginning to grow even with the government already projecting C$120 billion in deficits over the next six years. Calls for more government stimulus are growing, for example, given the weak economic outlook. Morneau is also in the part of the budget cycle when cabinet ministers and other stakeholders make their funding requests, which in this government’s case are poised to be substantial given Trudeau’s ambitious agenda. Provincial governments, meanwhile, are pressing Trudeau to increase health-care funding.
The finance department’s economist surveys -- up to four a year -- form the basis of its own economic forecasts, and this month’s poll is the last before the fall fiscal update. At a press conference Sept. 26 in Ottawa, Morneau declined to say when the update will be released and whether it will include additional measures to spur the economy.
“We’re working towards giving Canadians a good understanding of our economic situation this autumn and we’ll get to it and we’ll let you know as soon as we have an exact date,” Morneau told reporters at the start of public consultations for next year’s budget.
To be sure, the government has budgeted reserves for exactly this slower-growth contingency but those set asides are being tapped into quickly.
In his March budget, Morneau assumed a much slower growth outlook than the one economists were projecting. The tactic effectively gave him a C$6 billion annual revenue cushion against any slowdown. But using the finance department’s own revenue collection assumptions, it looks like Morneau has less than half of that cushion left to him for the next two years.
In some ways, the weaker economy is a vindication for Morneau, who was criticized following his budget for being overly cautious and unnecessarily inflating deficit projections. Canada’s budget watchdog for example claimed the risk cushion was excessive and made it more difficult for Canadian lawmakers to accurately scrutinize public finances.
“We put forth our budget using conservative projections in terms of economic growth,” Morneau said at the press conference. “We also put in a factor for risk, because we saw that there were real downside risks in the economy. What we’re seeing now is that the global economy is challenged.”
Here are some of the results from the Bloomberg poll and details of calculations for this story:
- The list of economists surveyed by government and budget 2016’s projections can be found here.
- The economists -- who had estimated nominal GDP of C$2.036 trillion in 2016 and C$2.129 trillion in 2017 -- are now forecasting output of C$2.017 trillion and C$2.101 trillion. The government’s play-it-safe estimates in the March budget -- the assumptions that gave it an annual C$6 billion cushion -- were for an economy of C$1.996 trillion in 2016 and C$2.089 trillion in 2017.
- Using the finance department’s assumptions that revenue will total 14.4 percent of output in 2016 and 14.5 percent of output in 2017, the numbers imply that the contingency left for the current fiscal year is down to C$3 billion and C$1.7 billion in 2017.
- That calculation assumes the government doesn’t top up the contingency reserves or make any changes to how much revenue it expects to generate per dollar of nominal GDP.