Canada’s budgetary watchdog says Justin Trudeau’s government has likely blown past a self-imposed fiscal guardrail, and is warning about the consequences of delaying the release of final spending and revenue numbers.
Yves Giroux, the country’s parliamentary budget officer, expects the federal government ran a deficit of C$46.8 billion in 2023-24. That’s deeper than the C$40 billion forecast by Finance Minister Chrystia Freeland in the April budget, and would break a key fiscal pledge she’s offered as evidence of her party’s spending discipline.
The government has until the end of the year to provide the numbers, but usually releases them in October, as they did last year. The delay raises questions about whether the numbers are worse than expected, which would add complications for Trudeau as his party struggles to regain traction with the electorate.
In an interview, Giroux said the holdup “goes against fiscal transparency and accountability” and leaves the country’s lawmakers to vote and approve hundreds of billions of dollars in spending and tax measures without knowing the state of the country’s finances. The numbers are finalized when revenue and spending tallies for the fiscal year are totaled, and the amount of time it takes to complete that process can vary.
Giroux’s office has been outspoken about setting a firm release date for the fiscal numbers, and suggests a deadline of Sept. 30 every year instead of leaving it to the incumbent government to hand over the final tally when it’s convenient for them.
“If it’s good news, they can play it up. If it’s bad news, they may try to find a more appropriate time where it gathers less attention,” Giroux said. “It’s quite likely that the government will have blown its own self-imposed target of a C$40 billion deficit.”
The government also hasn’t yet announced when it plans to provide an update on Canada’s current and future fiscal and debt issuance picture, which, in recent years, has been delivered in the form of a so-called fall economic statement. That’s typically a mini-budget outlining expected changes to spending and revenues, and may also contain the final 2023-24 numbers.
Giroux, who became the country’s third parliamentary budget officer in 2018, is quick to point out that the government’s fiscal guardrails were selected by the Liberals themselves. Failing to meet those targets may dent credibility in the eyes of Canadians, but he’s not expecting major consequences in markets.
“They need to blow their fiscal targets pretty significantly for that to have a material impact on the cost of financing,” he said.
At a news conference Tuesday, Freeland said she had no announcement to make regarding the fall economic statement, and said her government “is committed to being a responsible manager of the country’s economy and the country’s finances.”
Spending pressures
While the Bank of Canada was fighting to bring inflation to heel, Freeland faced pressure from economists to restrain government spending. She introduced her fiscal anchor in last November’s fall economic statement, promising to hold the 2023-24 deficit at or below the C$40.1 billion forecast in the 2023 budget, and maintaining a declining deficit-to-GDP ratio.
Currently, the deficit is about 1.4 percent of Canada’s gross domestic product, compared to over 6 percent in the US—but the northern nation doesn’t enjoy the luxury of having the world’s reserve currency. Still, Canada has an AAA credit rating and investors seem happy to buy up the country’s debt.
The spread between Canada and US 10-year yields is now more than 100 basis points, near the widest on record. While that in part reflects slower growth and cooler inflation prospects in Canada, it’s also a sign that markets may have less of a problem with the size of the country’s federal deficits relative to the US.
At the height of the inflation spike, it was important politically for the government to assure Canadians it was helping to cool price pressures and allowing Governor Tiff Macklem to start cutting rates. Affordability has rocketed to the top of voters’ concerns, and Trudeau’s Liberals have been about 20 points behind the Conservatives in most polls for over a year.
Now, it’s less clear that fiscal constraint will have the same perceived payoff. Since June, the central bank has cut interest rates from 5 percent to 3.75 percent, and inflation is hovering near the 2 percent inflation target.
Speaking to lawmakers last month, Macklem said he didn’t see a need to comment on fiscal policy now that price pressures are closer to target, a reversal from his remarks last year, when he warned that policymakers needed to consider the inflationary consequences of their spending. With economic growth waning, the central bank is actually looking for the country’s growth to pick up in order to stick a soft landing.
Trudeau’s government may also be pressured to spend more and provide boutique spending or tax breaks ahead of an election expected by late October 2025. While consumer confidence is rising, eroded purchasing power remains a challenge for incumbent governments around the world.
On Monday, the government released supplementary spending estimates showing higher expenses for 2024-2025.
Whether or not it’s publicly or politically desirable, there may be more room for Canada’s government to run deeper deficits. Giroux said the country’s fiscal trajectory is sustainable in the long run.
“There is room for either more spending or tax reductions or a combination of both. That doesn’t mean it’s desirable to do that,” he said.
“Maybe it’s desirable to invest in some areas or reduce taxes in other areas, but maybe the best course is to reduce the debt-to-GDP ratio, and that’s up to the electorate to decide.” With assistance from Jay Zhao-Murray/Bloomberg
