Deficit to hit $46.4-billion, above Ottawa’s projections, says budget watchdog

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Canada’s fiscal deficit is expected to come in at $46.4 billion in 2024-2025, above what was initially promised in the federal government’s spring budget, the Parliamentary Budget Officer said on Thursday.

Initial estimates in the spring budget indicated a $39.8-billion deficit for the 2024-2025 fiscal year, but the PBO’s Economic and Fiscal Outlook shows a different fiscal picture for Canada’s finances.

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Over a longer time horizon, assuming there are no new measures introduced, the PBO expects the deficit to decline to $22.5 billion in 2029-2030, but the Liberal government’s federal budget estimates had the deficit declining to $20 billion in 2028-2029.

The PBO estimates the debt-service ratio, which is the public debt charges relative to total revenues, will increase to 10.6 per cent this fiscal year, compared to 10.3 per cent in 2023-2024. The total amount of net-new spending over the next five years is estimated at $44.2 billion, accounting for new announcements between the spring budget and the end of August of this year.

Canada’s budget watchdog has also revised the debt-to-gross domestic product ratio over the next five years, with the ratio 0.2 per cent higher on average than what was initially expected in its last outlook in March.

“In 2023-24 and 2024-25, we expect the federal debt-to-GDP ratio to be 42.2 per cent,” the report said. “We then project the federal debt-to-GDP ratio to gradually decline to 39 per cent by 2029-30, remaining well above its pre-pandemic level of 31.2 per cent of GDP in 2019-20.”

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The PBO also predicts the economy will grow by 1.1 per cent in 2024.

“Despite the Bank of Canada’s recent rate cuts, interest rates will remain elevated for the rest of the year and will continue to put downward pressure on consumer spending and investment,” its report said. “Furthermore, we anticipate inventory investment will subtract from growth, as firms continue to reduce their stock levels.”

However, economic growth is expected to rebound next year as the effects of interest rate cuts by the Bank of Canada kick in.

“We project real GDP growth will rebound to 2.2 per cent in 2025, as lower borrowing costs provide a boost to consumer spending and business investment, and exports pickup,” the report said. “Over 2027 to 2029, we project real GDP growth to average 1.9 per cent which is slightly higher than our estimated growth in potential output (1.8 per cent) over the same period.”

The PBO expects the labour market to remain tight in the next few years, with unemployment above six per cent until the second half of 2026.

As for the inflation outlook, the PBO forecasts the inflation rate to stabilize at an average of 1.9 per cent between 2026 and 2028.

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