Home Economy What economists are saying about Ottawa’s fiscal update

What economists are saying about Ottawa’s fiscal update

by SuperiorInvest

But Ottawa should have channeled the rather surprising increase in revenue into its “bottom line”

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Liberal government fiscal updateunveiled on Thursday, paints a much different economic picture than the budget released in March, with Finance Minister Chrystia Freeland warning of a possible recession.

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Ottawa cut its forecast for this year’s gross domestic product (GDP) to 3.2 percent from 3.9 percent. It has also drastically reduced its projection for 2023 and expects economy growth of only 0.7 percent from the earlier forecast of 3.1 percent. Under the decline scenario, GDP could shrink by 0.9 percent next year, according to Ottawa.

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But economists think the 0.7 percent growth forecast is a bit optimistic, with some expecting GDP to reach 0.2 percent next year.

The update did bring one positive: a “super $40 billion” revenue surprise that will reduce the 2022-23 deficit to a projected $36.4 billion from a forecast of $52.8 billion in this year’s budget, the National Bank of Canada Financial Markets said.

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Still, economists at the Royal Bank of Canada said they’d prefer to see more of that windfall “slip through to the bottom line,” adding that “program spending in the current fiscal year is the highest it’s been in nearly three decades outside of the pandemic.” .”

Here’s what economists had to say about the fiscal update:

Cynthia Leach and Josh Nye, RBC Economics

“As expected, (Thursday’s) fall economic statement focused on new green growth initiatives with only limited affordability measures that could complicate the Bank of Canada’s fight against inflation. The government has built some fiscal space with strong nominal GDP growth that has significantly reduced its key debt-to-GDP ratio in the current fiscal year. But with nearly two-thirds of the positive economic and fiscal developments being recycled into new spending, there weren’t that many revenue surprises in his bottom line.

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Excluding the $8.5 billion reserve for “expected near-term pressures” (a new risk adjustment?), net new spending over the forecast horizon is almost equally growth- and affordability-oriented, and the latter is relatively well-targeted at lower income households. But these measures add to an already elevated spending path — at 15.7 percent of GDP, program spending in the current fiscal year is the highest in nearly three decades outside of the pandemic.

Rising public debt charges are limiting short-term improvements in the deficit profile, which is based on economic projections that now look optimistic (0.7 percent real GDP growth next year versus 0.2 percent in RBC’s forecast). The negative economic scenario (-0.9% growth next year) shows that government finances could go sideways quickly—literally, in terms of the debt-to-GDP ratio—and that doesn’t take into account the additional discretionary spending that would likely come with such a slowdown . While the government has retained some fiscal firepower heading into what we expect to be a mild recession in 2023, it may not have as much dry powder as it had hoped if it tries to stick to its fiscal anchors (debt-to-GDP ratio).

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Warren Lovely, Taylor Schleich and Daren King, National Bank of Canada Financial Markets

“…FES comes at a transitional moment for the Canadian economy, with slower growth taking hold as aggressive monetary tightening moves through the system. For now, however, we continue to receive mostly positive fiscal news from Canadian governments thanks to a stronger-than-expected decline in nominal GDP. That trend was evident, with the baseline revenue outlook up $40 billion from the budget.

In one form or another, Ottawa has earmarked some of the “bonus” revenue for new measures, the latest of which (unsurprisingly) focuses on “making life accessible.” The resulting budget deficit for 2022-23 of $36.4 billion represents a relatively modest 1.3 percent of GDP. The updated deficit figure represents a non-trivial improvement over the April budget, which forecast a $52.8 billion shortfall, and further extends the federal government’s overall fiscal recovery. Reference note: At the height of the pandemic, economic disruption and extraordinary government support saw the federal deficit swell to $327.7 billion. The deficit was cut to $90.2 billion by 2021-22 as the recovery took hold.

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In the medium-term fiscal outlook, the positive effect of the income base is carried over despite expectations of a slowdown in growth in the future. With positive net adjustments more than offsetting new commitments, the FES shows progressively smaller deficits for each fiscal year, culminating in a surplus of $4.5 billion in 2027-28 under the baseline scenario. Detailed year-over-year comparisons with the April budget reveal an average budget increase of $10 billion per year. In other words, the cumulative deficit (through 2026-27) is now $60 billion lower than projected in April, meaning less federal debt than previously telegraphed (here and now and over the long term).

The combination of smaller deficits and increased levels of nominal output could lead to significant progress in the federal debt-to-GDP ratio, which remains the government’s stated “fiscal anchor.” The closely watched metric is set to end at 42.3 per cent in 2022-23 against the 45.1 per cent level promised at the time of the Budget. The baseline scenario assumes only limited progress in the debt-to-GDP ratio in 2023-24, before regaining more meaningful downward momentum in the off-plan years (eg debt-to-GDP reaching 37.3 percent in five years).

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Stephen Brown, Capital Economics

“This year’s $6 billion in new federal spending measures, as outlined in the fall economic update, represents just 0.2 percent of GDP and will have little impact on the economic outlook or monetary policy. By using only a small portion of the windfall from higher revenues this year, the government has at least managed to provide some fiscal support without triggering a self-defeating reaction in financial markets.

“Our GDP forecasts are worse than consensus, with a 0.2 percent contraction next year and a sharper decline in the deflator, leading us to expect the deficit to widen again to two percent of GDP next year. At least the government has acknowledged this risk in an alternative set of projections that are closer to our own. Conveniently, the government’s baseline forecasts assume that the debt-to-GDP ratio will ease slightly by 0.1 points to 42.2 percent of GDP next year, so there will not be a need to push it up as much as we expect. However, public finances will look more favorable than in many economies, and unless the government has a sudden change of heart when recession hits, fiscal developments should not prevent the decline in bond yields we expect as the Bank of Canada cuts interest rates. “

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Andrew Grantham and Katherine Judge, CIBC Capital Markets

“In (Thursday’s) fiscal update, there was a significant reduction in the deficit projection for the current fiscal year, including some smaller
favorable economic projections from there and a modest increase in spending, updated longer-term projections now show a small surplus will be achieved by the 2027/28 fiscal year. The debt-to-GDP ratio is expected to fall to 42.3 percent in the current fiscal year from 45.5 percent last year and reach 37.3 percent at the end of the forecast horizon as it approaches pre-pandemic levels. (just over 30 percent of debt to GDP).

“The $36.4 billion deficit now projected for the current fiscal year 2022/23 (1.3 percent of GDP) is well below the $52.8 billion expected in the 2022 budget and a deficit of 90.2 billion dollars (3.6 percent of GDP) recorded in the previous year. Fiscal year. Revenue is expected to be ahead of those previous projections, largely due to higher income tax revenue. The upward revision to revenue projections more than offset somewhat higher spending, including increased public debt charges related to the rapid rise in interest rates so far this year.

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