Parliamentary Budget Officer lowers federal deficit projection by $3 billion

TheStar.com
Feb. 13, 2019
Marco Vigliotti

Parliament’s spending watchdog says new financial data suggests the federal deficit will fall by more than $3 billion compared to earlier projections, despite forecasting “sluggish” growth for the Canadian economy in early 2019.

In a report released Tuesday, the Parliamentary Budget Officer said it now projects that the government’s budgetary deficit for 2018-19 will total $16 billion, based on the most recent year-to-date financial results. It had projected the deficit would total $19.4 billion last October, before the Liberal government announced billions of new spending and tax breaks in last fall’s economic statement.

In a report released Tuesday, the Parliamentary Budget Officer said it now projects that the federal government’s budgetary deficit for 2018-19 will total $16 billion.

The so-called ‘mini budget’ pledged $600 million in incentives for the news media and $14-billion in write offs for Canadian businesses to offset massive corporate tax cuts in the U.S. It also promised additional $800 million for the Strategic Innovation Fund to help businesses adapt and take advantage of changing technology.

The PBO’s revised budget deficit projection is $2.1 billion lower than Finance Canada’s estimates included in the economic statement, which included a $3 billion risk adjustment buffer. But given the “recent strength” in financial results, the PBO said it did not expect this adjustment for risk will be “needed in its entirety” this fiscal year.

Despite the new spending promised by the Liberals since the 2018 budget, the PBO said it “significantly” lowered its estimates of the deficit for the year because of “stronger-than-expected growth” in tax revenues. In particular, corporate income tax revenues are projected to increase by $3 billion compared to the PBO’s October estimates.

However, the PBO is predicting the Canadian economy will continue to slow in the first quarter of 2019 after ending last year on a steep slide, lowering its projection of Canada’s GDP for the fiscal year by $6.9 billion.

In the final quarter of 2018, the Canadian economy grew by only 1 per cent, half its rate from the previous three months, largely because of falling demand for oil exports, according to the office, as tumbling prices continue to hammer producers. It predicts economic growth to remain at 1 per cent in the first quarter of 2019, attributing it to persistent softness in the oil sector.

The Alberta government has responded to declining oil prices by mandating production cuts, which the PBO says will reduce GDP growth by 0.5 percentage points in first quarter of 2019. It also predicts that the recently concluded partial U.S. government shutdown will slash an additional 0.2 percentage points off the GDP.

But despite the slowdown, the PBO said upward revisions for tax revenues suggest they will grow at a faster clip than it anticipated in the fall, while government program spending is forecasted to fall because less money will be doled out in employment insurance benefits. Canada’s unemployment rate hit a 43-year-low in December, and the economy added nearly 67,000 new jobs in January. The unemployment rate, though, did increase slightly over that span, because more people are searching for work.