The Conference Board of Canada’s Director of Forecasting Matthew Stewart offers the following insights on today’s Economic and Fiscal Update:
In its first release post-election, the federal government sought to increase Canadians confidence in their handling of the economy while following through on one of their key election promises. Although the deficit is projected to remain moderate, any economic downturn or drop in revenues could lead to its rapid increase and, with it, federal debt levels and debt repayment costs.
- After their recent downgrade to minority status, the Liberal government spent considerable time reminding citizens of Canada’s strong relative economic performance. It also followed through on one of the Liberal government’s key election promises—a reduction in the basic personal amount.
- The Economic and Fiscal Update focused on Canada’s recent economic strengths including strong employment and wage gains. It reminded Canadians that despite the negative news and some weakness early in the year, Canada will outperform most of the G7 in 2019.
- However, faced with weakening global growth, the Economic and Fiscal update also included modest projections for economic growth over the next five years.
- In particular, the government expects the economy to advance by just 1.6 per cent this year and an average of just 1.8 per cent per year over the next five years. While this is similar to the Conference Board’s latest base case projection, to be released tomorrow, substantial downside risks remain.
- Based on this economic outlook, the government expected that its deficit would have declined from $21 billion in 2019-20 to $8.3 billion in 2023-24.
- However, the government announced that it would follow through on its election promise to increase the basic personal amount by approximately $2,000 by 2023–24. The basic personal amount is the amount of income individuals can earn before having to pay tax. It is currently set at $12,300 and was set to rise to $13,000 in 2023.
- Increasing the basic personal amount will cost the government $6 billion a year once fully phased in in 2023-24.
- This change plus a few small other adjustments will bring the current deficit to $25.1 billion for 2019-20. It is then expected to decline over the next five years reaching $11.6 billion in 2024-25. Despite the planned decrease, the government will still add $123.1 billion to its federal debt by 2024-25.
- The federal debt will continue to decline as a share of GDP from its current level of 31 per cent to 29.1 per cent in 2024-25.
- The Economic and Fiscal Update did not include details on numerous spending promises made during the election. These will likely come during a budget early in the new year.
- While the debt to GDP ratio continues to remain on a downward track it is concerning that the government is running significant deficits during a time when the economy is operating close to potential. This leaves the government vulnerable in the event of a serious economic downturn.
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