Ottawa to run bigger than expected deficits over coming years: budget watchdog

OTTAWA—The federal government is on track to run deeper deficits than it’s been predicting for each of the next few years, says a new analysis released Tuesday by the parliamentary budget officer.

The watchdog also estimates Ottawa has just a 10 per cent chance of balancing the federal books in 2021-22 and a 30 per cent chance of seeing black ink in 2023-24.

The fresh projections come as Canada’s fiscal trajectory comes under closer scrutiny with only a year to go before the next federal election. The fate of the budgetary balance is positioned to emerge as a major campaign issue.

The Conservatives have frequently criticized the governing Liberals for abandoning their 2015 vow to run only modest shortfalls of no more than $10 billion and to eliminate the deficit by 2019.

The federal bottom line has received a multibillion-dollar revenue boost over the last year thanks to the stronger economy and the Liberal government has channelled large amounts of the extra cash into new spending it argues will lift Canada’s long-term growth.

The Liberals have no timetable to eliminate the deficits even though the economy is running close to full strength, which has raised concerns among some economists.

The report published Tuesday by Yves Giroux’s office predicts Ottawa is on pace to post a $19.4-billion deficit in 2018-19, which is $1.3 billion higher than the Liberal government’s projection in its budget last February.

Beyond this year, the watchdog says the annual shortfalls will be between $500 million and $2.8 billion bigger than the government’s predictions. It anticipates deficits of $21.3 billion in 2019-20, $17.4 billion in 2020-21 and $14.8 billion in 2021-22.

The larger forecasted deficits are tied to recent changes in how the government calculates its pension liabilities—which have immediately raised Ottawa’s direct program expenses—and to higher-than-anticipated increases in provisions for claims and litigation, the report said.

Last week, the government’s latest annual financial documents showed Ottawa posted a $19-billion deficit last year—slightly smaller than the shortfall it predicted in the budget.

Related: Final report on 2017-18 spending shows $19B federal deficit last year

Giroux’s report also examined the outlook for the economy.

It predicted major tax reform in the United States will not have a material impact on Canada’s investment climate. The business community and senators have urged Ottawa to immediately cut corporate taxes north of the border to prevent Canada from falling behind on competitiveness.

The budget officer said that in the first half of 2018 global foreign direct investment flows into Canada totalled $26.8 billion, which are broadly in line with figures over the past five years.

Finance Minister Bill Morneau intends to announce plans in his fall economic update in the coming weeks to bolster Canada’s competitiveness, but sources have said he’s looking at targeted measures rather than broad-based corporate tax cuts.

On trade, the report warned negative changes will shave 0.25 per cent from Canada’s gross domestic product by 2022. Real GDP, it predicted, would contract by 0.5 per cent if U.S. tariffs on steel, aluminum and other products—and Canada’s retaliatory levies—were made permanent.

If they remain in place, the watchdog said Canada’s duties on these imports are expected to generate additional revenue of $1.3 billion in 2018-19, $1.8 billion in 2019-20 and $1 billion per year, on average, thereafter.

Giroux doesn’t expect the recent agreement-in-principle on an updated North American trade deal—also known as the USMCA—to have a big impact on the Canadian economy. But he noted the uncertainty over its future have dissipated.

“We continue to believe the most important downside risk is weaker export performance due to rising protectionism in global trade policies, which would dampen global trade and economic growth,” his report said.