What economists are saying about Ottawa’s fiscal update

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The federal Liberals unveiled a series of measures aimed at addressing housing affordability in their Nov. 21 fiscal update, but also emphasized the need to keep government finances under control. Here’s what economists are saying about the update and what it means for spending this year, and into the future.

Sebastien Lavoie, Laurentian Bank

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In an effort to contain the federal deficit at $40 billion — and avoid fuelling inflation with additional government stimulus — the Liberals showed “temporary restraint” on spending, Lavoie said in an analysis released Nov. 22. But beyond the current fiscal year, Lavoie warned there was “no sign of permanent restraint but rather a preference to keep the fiscal easing tap open.”

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Over a six-year period, he said, deficits are forecast to rise by more than the amounts projected in the spring budget, and he described Freeland’s target of containing the deficit below one per cent of GDP by 2025-26 as not very ambitious.

Still, the economist does not think Ottawa’s debt-to-GDP position will deteriorate enough to cost it its favourable credit rating, a fate that has already befallen the United States.

“On the housing front, efforts to boost rental housing supply merit some credit, but the re-equilibrium of demand-supply remains an extremely long walk,” he added.

Avery Shenfeld and Katherine Judge, CIBC Economics

Ottawa is taking advantage of better-than-expected growth at the start of year to hold this year’s deficit at the level forecast in the spring budget, the CIBC economists said.

But housing, not fine tuning federal finances, is where Ottawa was looking to catch Canadians attention.

They estimate that the announcements made by Ottawa on the housing front — which included a commitment of more than $25 billion in low-cost financing to encourage the building of more than 71,000 new rental units and a further $13-billion commitment to build 60,000 new affordable homes — are “material relative to the size of the sector, but it will of course take time for this additional supply to be built and work to slow rent inflation.”

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Rachel Battaglia, RBC Economics

Ottawa is looking at a revenue windfall of $68.5 billion by fiscal 2028-29, more than was projected in last spring’s budget, Battaglia said, but it won’t necessarily mean smaller deficits.

Battaglia said the windfall will come from Ottawa’s pollution-pricing framework and higher interest revenue from Crown corporations, tax debt and net foreign exchange account holdings, but will be more than offset by spending increases of 5.6 per cent and 3.9 per cent in the next two years.

“We don’t view these projections as overly optimistic,” Battaglia said. “This re-acceleration will lead to higher deficits to the tune of $36 billion over the next four years relative to budget 2023.”

Battaglia does, however, think Ottawa in on the right track in trying to tackle the supply-side of Canada’s housing shortage.

“Building the number of homes needed is a protracted effort requiring investment, improved efficiencies to the development process, and time,” she said.

Warren Lovely, Taylor Schleich, Alexandra Ducharme, National Bank of Canada

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A smaller-than-expected deficit for fiscal 2022-23 has set Ottawa up to cope better with slowing economic activity, the National Bank trio said in a post-update note.

Still, they warned that “net new borrowing is expected to step up big time” with the issuance of $39 billion worth of Treasury bills this fiscal year and another $32 billion more in bonds.

“There’s no firm commitment to balance the budget (going forward),” they wrote, adding that Ottawa is instead focused on the deficit-to-GDP measure as a fiscal anchor to help it preserve its “sterling” credit rating.

Stephen Brown, Capital Economics

Capital Economics is less optimistic that Ottawa will be able to stick to its deficit-to-GDP projections in the coming years. While Ottawa sees the metric narrowing o 1.3 per cent in 2023-24, Brown is forecasting it will actually rise to 1.8 per cent as weakness in the economy leads to lower-than-expected revenues.

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Further, Brown has reservations about Freeland’s commitment to holding the line on spending.

“We doubt that the worsening public debt outlook would present any serious barrier to the government providing substantial fiscal stimulus if the economy were to fall into a deep recession,” Brown wrote.

With additional reporting from The Canadian Press and Barbra Shecter, Financial Post

• Email: gmvsuhanic@postmedia.com

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