The federal government could end up with billions more spending wiggle room thanks to soaring oil prices that experts say could cut the deficit or give the Liberals room to fund a slew of campaign promises .
It’s a position similar to the one the Liberals found themselves in last December, when a rosier economic picture gave the government $38.5 billion in extra spending room, which was quickly gobbled up in 28, 4 billion in new and previously promised spending.
Since then, oil prices have gone even higher than the Treasury had expected, with no immediate signs of letting up.
Rising prices could reduce the federal deficit by as much as $5 billion through increased tax revenue from oil and gas companies, said Trevor Tombe, an economist at the University of Calgary. “That’s more than the entire planned federal spending on new child care initiatives,” he said, referring to the $4.9 billion in new spending over the next 12 months outlined in the last year’s federal budget. “So this is a significant improvement in the federal bottom line,” he said.
In December, the Department of Finance predicted the government’s net result would show a $58.4 billion deficit for the fiscal year beginning in April, not counting new spending promises, after two years of even bigger deficits.
In early March, the Parliamentary Budget Officer (PBO) predicted the deficit would be $47.9 billion for the fiscal year that begins in April due to higher than expected tax revenues.
Rebekah Young, director of fiscal and provincial economics at Scotiabank, said her calculations lead to a similar result, which could provide ample fiscal room for the remaining Liberal platform promises, which the PBO has estimated at 48.5 billion over five years.
Inflation at peaks
The Liberals are unlikely to backtrack on those promises, especially anything related to efforts to close a housing affordability gap, Ms.me Young, but they could moderate spending lest it be seen as likely to push inflation rates already to highs not seen in three decades.
“I think they’re going to do the minimum they can to deliver on their promises, but otherwise hold the line, acknowledging what’s happening right now with inflation,” she said.
Although a problem for consumers, higher inflation rates boost federal revenues.
A 1% rise in inflation rates year on year reduces the deficit by about $2 billion a year, though this could easily be wiped out by higher interest rates, which the Bank of Canada hopes to push up to bring back inflation at its target level.
The possibility of prices rising faster and for longer is why the government and central bank must put the brakes on stimulus or risk entrenching higher inflation, the former parliamentary budget officer says Kevin Page, now President of the Institute for the Study of Fiscal Affairs and Democracy at the University of Ottawa.
“It would be a policy error for the government to assume that higher-than-expected inflation will create additional fiscal space that could be used to fund longer-term programs,” Page said, quoting the transfers for health care, childcare and a boost to the defense budget.
The war in Ukraine
Finance Minister Chrystia Freeland has hinted at an increase in military spending, following moves by NATO allies to increase defense budgets to 2% of their national savings in response to the Russian invasion of Ukraine.
The conflict has changed the world since the moment in early February when the government polled private sector economists on their outlook to help back up budget calculations.
Prices at the pump and at the grocery store are now climbing higher and higher as global oil and wheat prices rise.
“War and related sanctions have far-reaching effects on commodity markets. The world is facing a post-pandemic supply shock. Global growth will be reduced. Inflation will be higher,” Page said.
Risks and uncertainties explain why Mme Young said she expects the budget to be conservative in its economic outlook. She said she planned to review the level of detail provided by the government on its financial reserves to deal with any shocks that may still arise.
Mme Freeland has yet to announce a date for the budget, but it is expected to be tabled before the end of April.