PolicyMagazine – Red is the New Black: Deficits as Far as the Eye Can See Douglas Porter and Robert Kavcic

Finance Finance Minister Bill Morneau’s first budget projected a string of deficits as far as the eye can see, with even fiscal year 2015- 16 ending with a small deficit (after a small $1.9 billion surplus the prior year). This comes as little surprise, as it was well-advertised ahead of time that we would be looking at years of red ink, especially in light of a weakerthan-expected economic backdrop, loaded on top of the government’s election pledge to crank up spending and run $10 billion shortfalls. The two major areas of uncertainty heading into the budget were: 1) How much net new stimulus would be planned for the coming fiscal year; and 2) How aggressively would it be wound down in coming years, if at all? As mostly expected, Ottawa will stick to the initial election plan of injecting just over $10 billion of net new stimulus in the coming year (equivalent to 0.5 per cent of GDP), which will push the expected deficit to $29.4 billion. Deficits in excess of $20 billion then persist for two more years, and a $14 billion shortfall still remains by FY 2020-21—in other words, there is no plan to balance the books, even beyond the first mandate. This scenario would see the closely-watched debt-toGDP ratio rise again this coming fiscal year, to 32.5 per cent, before grinding back down to 30.9 per cent by 2020- 21, essentially back to where it started when the government took office. Note that above and beyond the headline-grabbing $29 billion deficits over the next two years, arguably the bigger story in the budget plan is the notable lack of a serious reversal of stimulus in the ensuing years. Recall that this government was elected on a pledge to run deficits for two years (at that time, just under $10 billion), and then bring finances back to balance over the next two years. That plan has gone out the window, and not just because the economy is more challenging in the near-term. Indeed, the budget includes net new fiscal measures of $7 billion per year as far out as 2020-21, leaving the After nearly a decade of relentless focus—sometimes borne out, sometimes not—on balancing the budget by the Harper government, the change of fiscal regime produced by October’s election results is overwhelmingly evident in the Trudeau government’s first budget. BMO’s Douglas Porter and Robert Kavcic break down the swing to a $29.4 billion deficit.

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