Posted at 5:00 a.m.
(Ottawa) The federal government is on track to reap approximately $12 billion more in additional revenue this year than projected just 6 months ago, due to a strong economy, rising commodity prices and the high price of a barrel of oil. Inflation, which hit 5.7% in February, is also helping to boost Ottawa’s earnings.
But everything indicates that the Minister of Finance, Chrystia Freeland, is preparing to use a large part of this windfall in her next budget which will be tabled in the House of Commons on Thursday not to reduce the deficit, but to increase spending.
The war in Ukraine is indeed forcing the Trudeau government to revise military spending upwards. The climate emergency, which was highlighted again on Monday by the most recent report of the Intergovernmental Panel on Climate Change (IPCC), is prompting it to finance new measures to reduce greenhouse gas emissions. greenhouse effect.
Finally, the parliamentary pact that Justin Trudeau made with the New Democratic Party (NDP) of Jagmeet Singh to ensure the survival of his minority Liberal government until 2025 obliges him to loosen the purse strings to finance new social measures. such as a dental program for the less fortunate, among other things.
According to calculations by the Department of Finance, each percentage point increase in nominal gross domestic product (real GDP plus inflation) provides the Canadian tax authorities with approximately $4 billion more revenue in the first year.
In her December economic statement, Minister Freeland estimated that nominal GDP would increase by 6.6% in 2022. However, private sector economists forecast an average increase of 9.5%, or almost 3 percentage points more .
At the same time, Minister Freeland was counting on an oil price (WTI) at US$73 per barrel in her economic statement. Economists estimate that it will oscillate further at US$98 a barrel. Since 1994, the Department of Finance has relied on average private sector economic forecasts to prepare the federal budget.
No balance in sight
“The steep rise in the cost of living, Russia’s invasion of Ukraine and the pact between the Liberal Party and the NDP are adding new priorities to government spending. This is likely to capture most of the unexpected additional income,” say Royal Bank of Canada economists Cynthia Leach and Josh Nye in a recent analysis.
Revenues are also expected to be higher than expected for the fiscal year ending March 31 due to the performance of the Canadian economy and commodity prices. The deficit for 2021-2022, which was to be $144.5 billion according to Minister Freeland’s projections in her December economic statement, could therefore be lower. The Royal Bank estimates that it could settle at 120 billion, or 25 billion less than expected.
According to the projections contained in the most recent economic statement, the deficit should reach 58.4 billion in 2022-2023, then increase to 43.9 billion in 2023-2024 and 29.1 billion in 2024-2025. No date for returning to a balanced budget was mentioned by Justin Trudeau’s Liberals, who also made promises totaling $78 billion during the last election campaign. In 2020-2021, the federal government recorded a record deficit of $327.7 billion due to the COVID-19 pandemic.
“A fantasyland budget”
For the past few months, economists and groups representing the business world have been urging the Trudeau government to restore budgetary discipline in Ottawa, which has been accumulating red ink for seven years now. They fear that an increase in spending by the federal government will have a perverse effect in that it risks fanning the embers of inflation. Already, the Bank of Canada is announcing that it will probably have to raise its key rate more quickly between now and the end of the year to counter inflationary pressures.
“That’s why the next budget is likely to be a fantasyland budget. Because to bring inflation back to 2% in an environment of full employment, when we see upward pressure on wages, it will take a strong remedy from the Bank of Canada,” analyzed Robert Asselin, senior vice-president of public policy at the Business Council of Canada and former close collaborator of former finance minister Bill Morneau.
The Bank Offensive [du Canada] will necessarily create a major slowdown in the coming years.
Robert Asselin, Senior Vice-President of Public Policy at the Business Council of Canada
The expected increase in spending in Thursday’s budget is already causing strong sparks in the House of Commons. On Monday, the Conservative Party accused the Trudeau government of spending lavishly to stay in power.
“Inflation is at a 30-year high. Everything you buy costs more. What is the prime minister’s priority in Thursday’s budget? It’s to please the New Democrats with a long list of new permanent expenses to ensure his position until 2025. Never Jean Chrétien, Paul Martin or John Manley would have dared to sacrifice their party in this way, “said the Deputy Leader of the Conservative Party, Luc Berthold.
“Our program and our plan are clear. Here are the facts: our GDP has increased for the eighth consecutive month. We have recovered 112% of the jobs lost during the pandemic. This is 3.4 million jobs. In 2022, Canada recorded the largest annual trade surplus since 2008, a total of $6.6 billion. The reality is that the economy is growing and that is a fact that the Conservatives do not like,” replied the Minister of Tourism and Associate Minister of Finance, Randy Boissonnault.