'There is no more fiscal room': Deficits expected to rise as the government projects dark economic clouds

The government now predicts next year will see a turn for the worse, increasing the deficit from a predicted $35 billion to $38.4 billion

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OTTAWA — The Liberals introduced a thin economic update Tuesday with little new spending and higher future deficits as economic conditions for the country are expected to worsen.

Finance Minister Chrystia Freeland’s fiscal update predicts Canada’s economy will slide next year, not quite veering into a recession, but weakening. The country’s economic growth is now expected to be just 0.4 per cent in 2024, down from the prediction of 1.5 per cent when Freeland tabled the budget in the spring.

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Stronger than expected economic growth this year helped the government keep the $40 billion deficit in line with its expectations from the spring budget, despite concerns from the Parliamentary Budget Officer that the deficit could balloon.

Canada likely hasn’t avoided the weak economic growth predicted in the budget, but simply delayed it. The government now predicts next year will see a turn for the worse, increasing the deficit from a predicted $35 billion to $38.4 billion. The economy was more robust than expected last year, reducing the deficit from $43 billion to $35 billion, but long-term projections from the finance department now show a stubborn deficit that will be much larger in the final years of the decade than the government previously expected.

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Higher interest rates and inflation will also increase the cost of borrowing for the government. Public debt charges will rise $2.6 billion higher this year and $6.4 billion higher the following year. In total, Canada will be paying $52.4 billion in debt charges by 2025, higher than it will be spending on federal health-care transfers.

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In her speech to the House of Commons, Freeland said the update reflects the government’s desire to keep its finances in check.

“We are ensuring that Canada’s finance remains sustainable, because that is how we will be able to continue investing in Canadians for many years to come,” she said.

The government makes its estimates using a blend of the estimates from banks and other financial institutions. She said despite those predictions souring on the economy’s growth potential, Canada is still moving in the right direction.

“Inflation is coming down, wages are going up and private sector economists now expect Canada to avoid the post-pandemic recession that many had predicted,” she said. “In the face of global inflation, our government has reduced the deficit faster than any other country in the G7.”

The update includes several housing measures that were leaked to media earlier this week, including an extension of a low-cost loans for apartment construction with new money available in 2026, a new Canada Mortgage Charter regulating how banks deal with mortgage holders and new tax rules designed to discourage short-term rentals like AirBNB.

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Conservative Leader Pierre Poilievre was quick to denounce the update as yet more spending, leading to higher deficits and fuelling inflation. He announced his party would not support any legislation connected to the fiscal update.

“This update can be summed up very simply: prices up, rent up, debt up, taxes up, times up. Common sense conservatives will vote non-confidence,” he said in the House of Commons.

NDP Leader Jagmeet Singh said he felt the update fell short of expectations, but he doesn’t intend to end his confidence and supply agreement with the Liberals over this update.

“We’re going to continue to work to get Canadians help and use our power that we have in to get Canadians things like potential care programs, to find ways to force this government to respond to the cost of living,”

Robert Asselin, a senior vice president with the Business Council of Canada, said the update shows the government now realizes it has to turn off the spending taps.

“It’s a very challenging fiscal track going forward,” he said. “It’s almost like they are coming to this very late. They should have been more worried about this in 2021.”

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Asselin said the government will be constrained going forward with a limited ability to take on big new projects.

“There is no more fiscal room for pharmacare. There is no more room for a big recession, before credit rating agencies start asking hard questions,” he said.

Most of the new measures in the update won’t cost the government money directly, but are instead achieved with new regulations or loans from arm’s length agencies like the Canada Mortgage and Housing Corporation.

The document also sets out timelines for green technology tax credits the government offered up in past budgets to combat the pull of America’s Inflation Reduction Act.

Asselin said for the government to have any new fiscal firepower the economy will have to dramatically improve, which he doesn’t believe is likely to happen.

“Things are only going to go south either with a recession or with inflation being more sticky,” he said. “I see more downside scenarios than upside scenarios.”

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