Ottawa is unlikely to meet its pledge to cap the federal deficit at or below $40 billion in the 2023-2024 fiscal year, say recent estimates from the Parliamentary Budget Officer (PBO) indicating that the federal government fell short of its target by 17 percent.
In its Economic and Fiscal Outlook report published Oct. 17, the PBO estimated the budgetary deficit at $46.8 billion in fiscal year 2023–24—1.6 percent of Canada’s GDP—and expected the federal debt-to-GDP ratio to be 42.2 percent that year.
In presenting the fall economic statement last November, Finance Minister Chrystia Freeland pledged new measures to keep federal deficits in check, saying Ottawa aimed to cap the 2023–24 amount at or below the spring budget projection of $40.1 billion, or 1.4 percent of GDP. The Finance Department reiterated in the spring budget released in April that the government was on track to fulfill its promise.
The PBO provided a different view in its latest assessment.
“Based on our analysis, the Government will not meet its fiscal commitment to keep the deficit below $40 billion in 2023–24,” said PBO Yves Giroux in an Oct. 17 news release accompanying his outlook report.
In his report, the PBO said that compared to his March economic and fiscal outlook, federal budget deficits are projected to be about $4.1 billion higher, on average, over the fiscal years 2023–24 to 2028–29.
“This increase is largely due to new spending measures announced by the Government that boost our direct program expenses projection,” the report said. The direct program expenses included “other transfer payments,” operating expenses such as “personnel expenses” and “consolidated Crown corporations,”and “capital amortization expenses,” according to the report.
‘Tepid’ Growth
Assuming no new measures will be announced by the Liberal government, the PBO estimated that the budgetary deficit will dip slightly to $46.4 billion in fiscal year 2024–25, though the federal debt-to-GDP ratio will remain at 42.2 percent.“Under status quo policy, the deficit is projected to decline over the medium term, falling to $23.8 billion (0.7% of GDP) in 2028–29,” Giroux added.
Meanwhile, the PBO predicted “tepid” growth in Canada’s economy for the rest of 2024, with real GDP growth advancing by 1.1 percent and unemployment rate hovering above 6 percent.
The outlook for next year is more optimistic, according to the budget watchdog, as it anticipates that the Bank of Canada will engage in more interest rate cuts to spur the economy.
“We anticipate the Bank of Canada will continue to gradually reduce its policy rate until it reaches its estimated neutral level of 2.75 per cent in the second quarter of 2025,” the PBO report said.
“We expect real GDP growth will rebound to 2.2 percent in 2025, as lower borrowing costs provide a boost to consumer spending and business investment, and exports pickup.”
On Oct. 15, Statistics Canada reported that the annual inflation rate fell to 1.6 percent in September, dropping below the central bank’s 2 percent target.
BoC Governor Tiff Macklem had said in September that Canadians can likely expect more interest rate reductions based on the progress that has been made in tackling inflation.
The central bank’s key interest rate currently stands at 4.25 percent. The next interest rate announcement is scheduled on Oct. 23.
Jennifer Cowan, Matthew Horwood, and The Canadian Press contributed to this report.
