The Liberal government's fiscal update paints a different picture than the budget released in March, with the finance minister warning of a possible recession
The forecast for this year'sGDP was lowered to 3.2 per cent from 3.8 per cent. The economy is expected to only grow 0.7 per cent in 2023, which is much lower than the 3.1 per cent it had predicted. GDP could go down by 0.9 per cent next year, according to the federal government.
Some economists think a 0.7 per cent growth forecast is a bit optimistic, while others think GDP will come in at 0.2 per cent.
According to a note from National Bank of Canada Financial Markets, there was a surprise revenue boost that will reduce the 2022-23 deficit to a projected $36.4 billion.
The economists at the Royal Bank of Canada said they would have liked to see more of the revenue go to the bottom line.
The fiscal update was discussed by economists.
The fall economic statement focused on new green growth initiatives with limited affordability measures that could have complicated the Bank of Canada's fight against inflation. In the current fiscal year, the government has built some fiscal room with strong nominal GDP growth and has been able to reduce its debt-to-GDP. Not as much of the revenue surprise flowed through to its bottom line was due to the fact that nearly two-thirds of positive economic and fiscal developments were recycled into new spending.
Net new spending over the forecast horizon does not include an $8.5-billion provision for anticipated near-term pressures. Program spending in the current fiscal year is the highest in nearly three decades, as a result of these measures.
Public debt charges limit near-term improvement in the deficit profile due to economic projections that now look optimistic. The government's finances could quickly go sideways, in terms of debt-to-GDP, and that doesn't account for additional discretionary spending that would likely come with such a slowdown. If the government sticks to its fiscal anchor, it might not have as much dry powder as hoped, since it has preserved some fiscal firepower.
Slower growth is set to take hold as aggressive monetary tightening works its way through the system. We continue to receive mostly positive fiscal news from Canadian governments due to a stronger-than- expected glide path for nominal GDP. The revenue outlook boosted the budget by 40 billion dollars.
The newest of which are focused on making life more affordable is one of the ways in which the bonus revenue has been committed. The budget deficit for 2022-23 is a relatively small 1.3 percent of GDP. The updated deficit tally is an improvement over the April budget, which had a shortfall of $52.8 billion. The federal deficit increased to $327 billion at the peak of the swine flu. The deficit was reduced to $90.2 billion by the end of the decade.
Despite an expectation of slower growth, the fiscal outlook shows a positive revenue base effect. With positive net adjustments more than offsetting new commitments, the FES flags successively smaller deficits for each fiscal year, leading to a $4.5-billion surplus in the 28th century. An average budgetary upgrade of $10 billion a year is shown by the detailed year- by-year comparisons. The cumulative deficit is now $60 billion lower than it was in April, which means less federal debt.
Combining smaller deficits with an upgraded level of nominal output could make for nifty progress on the federal debt-to-GDP ratio. This closely watched metric is expected to end in 2022-23 at 42.3 per cent compared to the budget goal of 45.1 per cent. The baseline scenario only implies limited progress on debt-to-GDP in the first two years of the plan, before regaining more meaningful downward momentum in the last two years of the plan.
The $6 billion in new federal spending measures for this year will have little impact on the economic outlook or monetary policy. The government has succeeded in providing some fiscal support without triggering a self-destructive reaction in financial markets by utilizing only a small portion of the windfall from higher revenues this year.
The GDP forecasts are more pessimistic than the consensus, with a 0.2 per cent drop next year and a sharper fall in the deflator leading us to expect the deficit to widen to 2% of GDP next year. This risk was acknowledged by the government in an alternative set of projections. The government assumes that the debt-to-GDP ratio will edge down by 0.1 point next year, so it won't take much to push it up. Unless the government changes its mind when the economy goes into a recession, the fall in bond yields will not be affected by the Bank of Canada cutting interest rates.
Even with some less favorable economic projections from here and modest spending increases, the updated long-term projections now show a slim surplus being achieved by fiscal 2027/28. The debt-to-GDP ratio is expected to fall to 42.3 per cent in the current fiscal year, from 45.5% last year, and reach 37.3 per cent by the end of the forecast horizon.
The current fiscal year is projected to have a deficit of $36.4 billion, which is less than the $52.8 billion that was expected and the $90.2 billion shortfall seen in the prior fiscal year. Income tax receipts are expected to be higher than anticipated. Increased public debt charges linked to the rapid rise in interest rates were more than offset by the upward revision to revenue projections.
Less than half of this year's revenue windfall will be used to improve the bottomline. Slower growth and rising interest rates will limit flexibility into the future. Costs eventually catch up to prices, and revenues are affected by the economic downturn. After a nice run of better-than- expected fiscal outcomes, the finances are expected to turn more challenging. The budget deficit is expected to be $30.6 billion, or just 1.1 percent of GDP, in the coming fiscal year, and then to $25.4 billion in the following year. We think that the economic and interest rate scenario built upon are a tad optimistic and closer to Finance's downside scenario.
Thanks to the tremendous strength in revenues flowing from robust income growth, the fiscal update shows a healthier picture. The debt-to-GDP ratio is expected to come down further in the current fiscal year to 42.3 per cent and gradually fading from there. Next year's budget will give a more complete measure of the fiscal landscape if the government follows its election platform. We will have a better idea of how high interest rates will have to go in order to break inflation. Today's fiscal news can be characterized as moderately positive, as the government steered clear of an already tough inflation backdrop.
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