Federal budget deficit shaved in half to $25.8-billion, PBO projects

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Parliamentary Budget Officer Yves Giroux says this year’s federal budget deficit is on pace to come in at $25.8-billion – about half of Finance Minister Chrystia Freeland’s estimate in the government’s April budget.

Mr. Giroux released an economic and fiscal outlook Thursday that shows much has changed since the budget said the deficit for the 2022-23 fiscal year would be $52.8-billion.

The PBO report updates projections for federal spending and revenue in light of the latest economic data and spending announcements, including the government’s recently announced $4.6-billion affordability plan, aimed at helping low-income Canadians manage the higher costs of living.

The figures offer a sense of what Canadians can expect when Ms. Freeland provides a fall economic and fiscal update, which has not been scheduled but is expected to be released in the coming weeks.

If the government decides not to announce any new spending, the PBO numbers show Ottawa could be close to balancing the books within four years, with a $3.4-billion deficit in 2026-27 and a $3.1-billion deficit in 2027-28.

The federal debt-to-GDP ratio is also projected to decline over the next few years – from 45.8 per cent last year to 36.2 per cent in 2027-28 – but that would still be above the prepandemic level of 31.2 per cent.

While higher inflation and a relatively strong economy have boosted federal tax revenues, higher interest rates are also forcing Ottawa to spend more to service the higher debt load it built up during the pandemic.

“Despite the projected decline in the budgetary deficit, public debt charges are projected to more than double from their 2020-21 level (of $20.4-billion), reaching $47.6-billion in 2027-28 due to higher interest rates and the additional accumulation of debt,” the report states.

The PBO says the debt-service ratio, which is public debt charges relative to tax revenues, will remain near historic lows, peaking at 11.5 per cent in 2024-25.

A recent survey of independent economists conducted by Consensus Economics found that the average projected size of the 2022-23 deficit was $42.1-billion.

But Randall Bartlett, the senior director of Canadian economics at Desjardins, released projections last week showing a federal deficit of just $20.1-billion for the current fiscal year. Desjardins’ numbers show the deficit widening the following year to $39.3-billion – in an interview, Mr. Bartlett said he expects the economy to be hit hard by further interest rate hikes – before declining steadily to $1.7-billion by 2026-27.

The federal government has yet to release the public accounts, which would show the final deficit figure for the 2021-22 fiscal year, which ended March 31. The April budget estimated it would be $113.8-billion, but both the PBO and Desjardins’ reports say the final number is likely to be around $97-billion.

However, medium-term projections indicate that balancing the federal books could soon re-enter the conversation in Canadian politics.

The next federal election is scheduled for 2025, and new Conservative Leader Pierre Poilievre has made reduced federal spending a priority.

“I think that will become a part of the conversation in a way that wasn’t in, say, 2021 or even in 2019, for that matter,” Mr. Bartlett said. “The question for me is what do they do with that extra fiscal room. Do they hold back the funds to plan ahead for the economic weakness we’re anticipating – and I would say most shops are – or are they going to increase spending and transfers to low-income households?”

Jean Chrétien’s Liberal government returned the books to surplus in 1997-98 after Canada’s debt and deficit levels became a cause for concern in financial markets. Surpluses continued until the 2008 financial crisis, which occurred two years into Stephen Harper’s Conservative government. That deficit was gradually wound down, and a $1.9-billion surplus was recorded for 2014-15. However, that figure was later revised to a $550-million deficit as part of a 2018 accounting change related to future liabilities, such as pensions.

Justin Trudeau’s Liberals won the 2015 election on a pledge to run short-term deficits of no more than $10-billion and to balance the books in 2019-20.

As the government, they went on to run three years of higher-than-promised deficits. The pandemic led to a sharp spike in the size of the deficit owing to the near-halt of economic activity and the increase in government spending to support affected individuals and businesses, reaching a peak of $327.7-billion in 2020-21.