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Posthaste: Brace yourself, Canada's deficit could swell bigger than we thought Back to video

Unveiling its fall economic statement yesterday, Ontario actually cut its deficit forecast, but don’t hold out hopes for the same from Ottawa, say economists.

According to Desjardins Group, the prognosis for balancing Canada’s books is not good. It expects to see bigger budget deficits in the federal fall economic statement than were forecast in the spring Budget, despite an improved outlook for the economy and lower interest rates.

Desjardins estimates that the deficit will reach $46.5 billion in the 2024-25 fiscal year, compared to the Budget forecast of $39.8 billion.

But fiscal headwinds are mounting and the outlook could get even worse, says Randall Bartlett, senior director of Canadian Economics.

One headwind is the proposed hike to defence spending to reach the NATO target of 2 per cent of gross domestic product by 2032. The parliamentary budget officer (PBO) said this week Canada would have to nearly double defence spending to keep this promise.

At the very least it could add another $10 billion to federal deficits by the 2028-29 year, Desjardins estimates.

“This alone would risk violating the federal government’s fiscal anchor of keeping deficits below 1 per cent of GDP in 2026–27 and future years,” said Bartlett.

Canada’s plan to reduce the number of immigrants and temporary foreign residents will also have an impact. If fully implemented, population growth could fall below the lockdowns of the pandemic, lowering GDP and tax revenues.

Changes to the capital gains inclusion rate are also expected to generate less revenue than the government estimated in the budget. According to the PBO, the tax hike could bring in as much as $2 billion less over the next five years.

Further expansion of the national pharmacare plan and calls for an increase in seniors’ benefits could boost spending.

Add all this up and even Desjardins’ worst scenario could be too optimistic, said Bartlett, and that’s without accounting for the “greatest uncertainty facing the Canadian economy right now” — the U.S. election.

If Donald Trump is elected and follows through on his threat to slap tariffs on all imports “that has the potential to hit the Canadian economy hard,” he said.

“When combined with the previously mentioned fiscal headwinds, a Trump re-election would almost inevitably cause the federal debt to rise continuously as a share of nominal GDP.”

Bartlett said the government could raise taxes to offset some of these deficit pressures but “that well is increasingly running dry.” Planned tax revenues are nearing the share of GDP they were in the 1980s and ’90s.

A survey by the Canadian Federation of Independent Business this week found that 74 per cent of small businesses are worried about Ottawa’s lack of a plan to return to a balanced budget.

According to the CFIB, all the money collected from the goods and services tax just covers the $54 billion in annual interest Canada pays on its national debt.

Four years from now the amount going to debt charges will be high enough to have eliminated the GST, energy tax, custom import duties and excise taxes combined in the 2022/23 fiscal year, it said.

“Increasing taxes is not a sustainable solution,” said Jasmin Guenette, vice-president of national affairs at CFIB. “Ottawa needs to stop acting as if it has money to burn and, instead, work to avoid driving up the national debt.”

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The last reading on America’s economy before election day came in yesterday — and it was good news for vice-president Kamala Harris.

Gross domestic product rose at a 2.8 per cent annualized pace after rising 3 per cent in the previous quarter — the sixth quarter in a row it has held above 2.5 per cent.

That’s “the longest stretch of such solid growth since 2006,” Bill Adams, chief economist at Comerica Bank, said in a note.

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Today’s Posthaste was written by Pamela Heaven, with additional reporting from Financial Post staff, The Canadian Press and Bloomberg.

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