Parliamentary Budget Officer Yves Giroux prepares to appear before a committee in Ottawa, on June 13, 2022. The parliamentary budget officer says higher interest rates will lead the economy to stagnate in the second half of the year, while the federal deficit will rise significantly this fiscal year.Justin Tang/The Canadian Press
The federal deficit is on pace to exceed $46-billion this year, which is $6-billion more than projected in the March budget, according to a report by Parliamentary Budget Officer Yves Giroux.
The PBO’s economic and fiscal outlook reports – typically released in March and October ahead of the federal budget and fall update, respectively – provide an independent assessment of the direction of federal finances.
Friday’s report said that since the PBO’s March fiscal forecast, the government has announced $28.6-billion in net new spending over five years, including subsidies for electric vehicle production and a GST rebate on the construction of rental housing. It does not include potential spending such as pharmacare measures.
“It’s consistent with what we’ve seen so far by this government. They are not shy of spending and intervening in the economy outside of the normal budget and fiscal update cycle,” Mr. Giroux said in an interview.
The March federal budget said this year’s deficit would be $40.1-billion and the debt-to-GDP ratio would be 43.5 per cent of GDP. Friday’s PBO report projects the deficit will be higher than planned at $46.5-billion, but the debt-to-GDP ratio will beat the budget target slightly. It will rise to 42.6 per cent in the current 2023-24 fiscal year, from 42 per cent last year. This will be followed by 42.3 per cent the next year and small future declines.
Mr. Giroux singled out the increase in light of the fact that Finance Minister Chrystia Freeland has said a declining debt-to-GDP ratio is the government’s “fiscal anchor,” or guiding principle for managing federal finances.
“That’s a worrying trend, especially in light of recent announcements where they have provided significant subsidies to multinational corporations, and the yet-to-be announced pharmacare program,” he said. “There is a trend toward announcing a fiscal anchor, but then ignoring it or dismissing it on a ‘temporary basis,’ and then announcing further expenditure. So it suggests that the fiscal anchor the government has set for itself, it’s not strictly adhering to it.”
While Ms. Freeland has not announced a date for the government’s fall economic and fiscal update, which is typically released in November, she is scheduled to meet with private sector economists next week. The government’s budget and fiscal update numbers are based on an average of private-sector economic forecasts.
Friday’s PBO report shows that annual federal deficits over 2022-2023 to 2027-2028 will be about $4-billion larger on average than what the PBO had estimated in its March report. The PBO’s numbers are broadly in line, however, with the government’s March budget forecast.
Some private sector economists have expressed concern about the potential impact of a recent global bond market rout, given that long-term interest rates have risen dramatically in recent months.
A Bank of Montreal research note said that if interest rates settle at a higher level than before the pandemic, it could add $10-billion to the annual deficit “down the road.”
Economists at Desjardins have said higher interest rates could add about $5-billion a year to the federal deficit.
Mr. Giroux said he views such a scenario as a downside risk to his forecast, but does not believe it is the most likely course of events.
“We recognize it’s quite possible that the increase in interest rates, should it be maintained over the medium term, would negatively affect the fiscal bottom line. But we don’t think that will be the case. But it’s always a risk.”
The PBO report shows spending on public debt charges will jump to $46.4-billion this year from $34.8-billion the year before. That forecast for the current year is $2.5-billion higher than the government estimated in the budget.
Friday’s report repeats Mr. Giroux’s long-standing criticism of the government’s slow pace in publishing year-end results. The public accounts for the fiscal year that ended in March have not been published, meaning the PBO had to make assumptions about final numbers.
“As noted in our previous reports, the government continues to fall short of the standard for advanced practice in the International Monetary Fund’s financial reporting guidelines, which recommends that governments publish their annual financial statements within six months of the close of the fiscal year,” the PBO report states.
CIBC chief economist Avery Shenfeld said in an e-mail that whether Ottawa hits its targets will depend on the outcome of stated plans to find internal savings, and whether further spending is announced.
“For that, we’ll have to wait for the fall fiscal update, and next year’s budget, to see if getting closer to an eventual election leads to additional program announcements,” he said.
Editor’s note: An earlier version of this story incorrectly reported that the PBO said $28.6-billion in new spending over five years had been announced since the March 28 budget. The PBO said that amount of new spending has been announced since the last PBO forecast on March 2, which includes spending announcements in the budget. This version has been updated.