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Better Economy Improves Budget Deficit

Oct 24, 2017

The Conference Board of Canada’s Matthew Stewart offers the following perspectives/insights on the Fall Economic Statement:

Quote

“The Canadian economy delivered solid, and above expected, growth in the final months of 2016. This is positive news and provides a good handoff to 2017. It sets the stage of healthy, but moderate, growth of slightly above 2 per cent this year,”
—Matthew Stewart, Director, National Forecast, The Conference Board of Canada.

Insights

  • The economic outlook contained in the Fall Economic Statement is considerably stronger than it appeared seven months ago in Budget 2017.
  • The economy is now expected to grow by 3.1 per cent in 2017 much better than the 2 per cent projected in the last budget. However, the stronger growth will be short-lived with growth returning to below 2 per cent by 2019.
  • The stronger economy together with lower program spending will boost the deficit by $8.9 billion this fiscal year and by an average $9.4 billion over the following four years. 
  • Overall, the new deficit will fall from $19.9 billion to $12.5 billion in 2022-23. Although this is considerably better than projected in the last budget it remains well above the deficit outlined during the election and there remains no timetable to balance the books.
  • With the economy performing well, in our view there was little reason for the government to increase spending. The government would be better served by creating fiscal room should additional stimulus be needed. Currently, there are significant risks to the near-term outlook—a U.S. withdrawal from NAFTA would have a substantial impact on economic growth and it’s been 8 years since the last recession, another business cycle could be just around the corner.
  • The government did put aside some of the windfall, allocating just one-third of the improved fiscal situation towards new initiatives, with two-thirds going to deficit reduction. • The largest increase in spending was an improvement in the Canada Child Benefit (CCB). Beginning in July 2018 the CCB will be indexed to keep pace with inflation. The government had previously promised to index the CCB starting in July 2020. This will increase the maximum monthly benefit for a child under 6 by $96 in 2019-20.
  • The government also announced an increase to the working income tax benefit. This will cost $500 million starting in 2019. However, the exact details have not yet been determined. 
  • The government will lower the small business tax rate to 10 per cent effective January 2018 and to 9 per cent in 2019. This will provide small businesses up to $7,500 is corporate tax savings per year and cost about $700 million when full phased in. About $200 million of the tax reduction for small businesses will be offset by new measures to limit income sprinkling. 
  • The bottom line is that this is a good news story. A better economic situation allowed the government to move forward on a few new initiatives while improving the fiscal outlook.
  • With the economy performing well, in our view there was little reason for the government to increase spending. There is also a real risk that the U.S. could withdraw from NAFTA which would have a substantial impact on economic growth. Also, it has been almost ten years since the last recession. The government needs to create the fiscal room to provide stimulus if needed. While there is some risk that an economic shock could result in a substantially higher deficit, the debt-to-GDP ratio remains on a downward path, projected to fall from 31.3 per cent today to 30.0 per cent in 2022-23.

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Photo of Craig Alexander Craig Alexander
Senior Vice-President and Chief Economist

Craig Alexander brings over 19 years of experience in the private sector as an economic and financial forecaster to the position of Senior Vice President and Chief Economist. He oversees the Board’s macro-economic outlook products, custom economic and tourism research.

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