PBO says Canada’s deficits could be billions more than forecast

OTTAWA—Canada’s budget watchdog is casting doubt on the Liberal government’s forecasts for the federal books, warning that medium-term deficits will likely be billions of dollars higher than expected.

The government is on track to deliver annual shortfalls that could turn out to be $10.8 billion higher than the projections in Finance Minister Bill Morneau’s recent fiscal update, the parliamentary budget office said Tuesday.

Over the near term, however, the budget office predicted the public books would be in better shape than the government anticipates.

In fact, the budget office says Ottawa is currently headed for a $1.2-billion surplus this fiscal year—a $4.2-billion swing from the Liberals’ $3-billion shortfall projection for 2015-16.

The report underlined the biggest reasons for the contrasts between the two 2015-16 calculations as “other revenues” and “direct program expenses,” which, combined, accounted for $3.9 billion of the difference. It noted the government had yet to release the detailed data for those categories.

“For this reason, PBO cannot assess whether the government’s outlook for the 2015-16 budgetary balance is pessimistic,” said the report by parliamentary budget officer Jean-Denis Frechette.

In April, the previous Conservative government projected a $2.4-billion surplus for 2015-16—including the $1 billion set aside for contingencies.

Some observers have said it could be in the Liberal government’s interest to lower expectations and blame their Tory predecessors as a way to deflect future fiscal criticism.

Frechette’s report also included a 2016-17 deficit estimate that’s $900 million smaller than Ottawa’s forecast.

But for the fiscal years between 2017-18 and 2020-21, the budget office warned the federal books are on a trajectory to produce annual shortfalls of $2.3 billion, $3.6 billion, $6.3 billion and $10.8 billion higher than the Liberals’ predictions.

Frechette pointed to Ottawa’s “more optimistic outlook” for revenues it expects to rake in from personal and corporate income taxes as well as the GST.

“The government’s status-quo outlook for the economy and federal budget over the medium term is optimistic,” the report said.

“Based on forecast comparisons and forecast revisions, PBO believes that there is downside risk to the government’s medium-term outlook.”

Later Tuesday, Morneau defended his department’s fiscal numbers by saying the fall update relied on the average of private sector economic forecasts, just as previous governments have done for over 20 years.

He said the fall update provided a “realistic and sound assessment of Canada’s economic and fiscal position” and he noted his department added a “downward” adjustment to the private-sector forecast to account for global uncertainty.

“In the government’s view, the forecasts generated by private-sector economists, along with historical and year-to-date results, remains the best basis for economic and fiscal planning,” Morneau said in a statement, which did not directly reference the PBO report.

Conservative finance critic Lisa Raitt said the PBO prediction for 2015-16 shows that her party left the government finances in good shape.

“We managed the government very well and we were ready for economic shocks that seemed to be happening from outside of our shores,” Raitt said in an interview.

“We hope that the Liberals take a lesson from what we’ve done, so that they can avoid the pitfalls that other countries in the world haven’t been able to avoid…. Now is not the time to start running these deficits because they’re going to be a lot bigger than you think they are.”

Raitt also zeroed in on the budget office’s challenge that the Liberals were too rosy in their expectations about tax revenues.

Frechette’s report did point out that there’s little difference between the PBO and the Finance Department figures when it comes to their combined outlooks for the period between 2015-16 and 2018-19. Over those years, the report noted the government is predicting an average annual shortfall of $2.7 billion while the budget office is projecting $2.9 billion.

The fresh projections mean additional pressure on the Liberals to live up to their election vows to keep their expected annual deficits from climbing and to balance the books in four years. The Liberals pledged to boost federal infrastructure spending by billions of dollars as a way to fire up the economy and create jobs.

Both the budget office and government numbers were crunched before factoring in the billions of dollars in election-campaign spending commitments by the Liberals.