Deficits to Test Trudeau’s Fiscal Prudence, Budget Watchdog Says

(Bloomberg) -- Justin Trudeau’s deficits could grow even larger, according to Canada’s budget watchdog, who said the government may have to abandon a key fiscal anchor in the event of an economic downturn.

The federal government’s shortfalls will be C$2.6 billion ($2 billion) higher on average per year than what Trudeau’s finance minister laid out in his recent economic update, the Parliamentary Budget Office said in a report Thursday. The watchdog’s forecast for the size of the economy averages C$21 billion lower per year than the private sector forecasts used by the government. The PBO sees “downside risk” to expectations of economic growth.

Trudeau’s Liberals pushed the nation’s finances deeper into the red this week, largely because of actuarial revaluations to federal employee pensions that added about C$28 billion in government expenses through 2025. That leaves the prime minister with a weaker fiscal starting point than expected for his second term.

The PBO also commented on the potential vulnerability associated with higher deficits, suggesting that the government’s chosen fiscal anchor -- a declining debt-to-gross domestic product ratio -- could be at risk if the government needs to boost fiscal spending to counter a shrinking economy. “Deficits in this range permit limited fiscal flexibility in the event of an economic downturn to maintain a declining debt-to-GDP,” the PBO said.

The budget watchdog, whose baseline estimates were used by political parties to cost their 2019 election platforms, also pointed out that Finance Minister Bill Morneau has temporarily abandoned the government’s commitment to keep the debt under control relative to the size of the economy.

The fiscal outlook “does not meet the government’s commitment to reducing debt relative to GDP,” the PBO said. Debt as a share of GDP will already be rising to 31% this fiscal year, up from 30.8% in 2018-19.

To contact the reporter on this story: Erik Hertzberg in Ottawa at eschmitzhert@bloomberg.net

To contact the editors responsible for this story: Theophilos Argitis at targitis@bloomberg.net, Stephen Wicary, Chris Fournier

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