01/27/2016 11:33 EST

Canada's Federal Deficit To Total $50 Billion In Next Two Years, And That Might Be Good News

Some economists say a large deficit is just what's needed right now.


  • $25 billion in deficits forecast for each of next two years
  • Impact of oil crash on government finances ‘could prove long lasting’
  • Larger deficit would be welcomed by some economists

The federal government’s forecasts for economic growth are far too optimistic, and Ottawa faces $50 billion in deficits over the next two years, says a report from National Bank Financial.

The government’s 2016 forecast for nominal GDP -- which largely determines how much tax revenue it will take in -- is more than double what the country is likely to see, economists Krishen Rangasamy and Warren Lovely wrote.

They see the federal government running a deficit of $15 billion in each of the next two years, not including the $10 billion in stimulus spending the Liberal government has promised. That amounts to $25 billion in deficits in each of the next two years.

“Worse, the impact on government finances could prove long lasting,” Rangasamy and Lovely write.

Because of the severe drop-off in business investment in Canada caused by the oil price collapse, “the economy’s potential for growth risks being severely curtailed,” they added.

The collapse of oil prices caused investment in Canada's economy to shrink in 2015, even as consumer demand and foreign trade strengthened. National Bank Financial says this means Canada's economy will grow more slowly in the years to come. (Chart: NBF)

The federal Liberal government seems to be aware of the possibility of larger deficits ahead. Finance Minister Bill Morneau warned earlier this month that economic growth will fall short of the previous Conservative government’s projections, but he didn’t make any predictions about how that would affect the budget.

"We knew when we were campaigning we were facing a slow-growth environment," he said. "The challenge is greater than we expected."

Not everyone thinks running deficits in this economic environment is a bad idea. A growing number of economists have actually been urging the Trudeau government to run larger deficits than the $10 billion the Liberals promised during the election.

"If the government wasn't spending years strengthening our nation's balance sheet to use it as a weapon against downside economic risks as is the case today, then what was the point of it all?"

CIBC chief economist Avery Shenfeld says a $30-billion annual deficit would be “well warranted” under the circumstances, and estimates that would add some 0.5 percentage points to economic growth.

“It’s apparent to me that the economic outlook has deteriorated to the point where one could easily question whether [a $10-billion deficit] is a sufficient boost, particularly with some provinces in a restraint mode,” he said, as quoted at the Globe and Mail.

David Rosemberg, chief economist at wealth management firm Gluskin Sheff, says the feds could run $24 billion in deficits every year through 2020 without going above the average public debt burden seen among developed economies. Canada’s debt-to-GDP ratio is 31 per cent, compared to 70 per cent among OECD countries, on average.

"What is Ottawa waiting for?" Rosenberg wrote, as quoted at the CBC.

"If the government wasn't spending years strengthening our nation's balance sheet to use it as a weapon against downside economic risks as is the case today, then what was the point of it all?"

That certainly seems in keeping with Prime Minister Justin Trudeau's own philosophy. At the World Economic Forum in Davos, Switzerland, last week, the prime minister urged other nations to spend their way out of economic stagnation.

The National Bank forecast lowered its forecast for economic growth for 2016. The bank now expects Canada's economy to grow a paltry 0.9 per cent this year, down from an earlier forecast of 1.6 per cent. That's lower than the consensus number among economists, which sees 1.7 per cent growth.

(H/t: Michael Babad @ Globe and Mail)

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