The Liberals will probably break their $10-billion-deficit promise: Here’s why

The Liberals are backing away from their election promise to keep the budget deficit under $10 billion for the next two years – and it could have something to do with the math.

The Liberal platform said that the government was starting at a $600 million surplus, based on projections from the Parliamentary Budget Officer.

A projected $25 billion in new revenue and $35 billion in new spending worked out to a $9.89 billion deficit in 2016-17, and not a lot of wiggle room to keep it under $10 billion.

But those projections proved overly optimistic.

The starting point

In a financial update last month, the federal government said GDP will be lower than expected this year and next due to lower commodity prices and low crude oil prices.

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This means lower government revenue and higher Employment Insurance costs, so public coffers get hit from both sides.

Lower revenue

The Liberals’ tax hike for Canada’s richest was supposed to put an extra $2.8 billion in the bank.

But a weakened economy means lower earnings and lower tax revenues. A Department of Finance backgrounder from early December puts the revenue gain at just $2 billion in 2016-17 – $800 million less than expected.

Finance Minister Bill Morneau has admitted the tax changes the Liberals passed last week, which include cuts to middle class tax rates, will actually cost the government money.

Higher expenditures

The Liberals expected that cutting the middle class tax rate would cost about $2.9 billion in 2016-17.

That December update from the Department of Finance says it will cost $500 million more – $3.4 billion. Assuming all their spending promises come in on-budget, that’s still extra money going out the door from that single measure.

The bottom line

It all adds up to Trudeau’s refusal in a Wednesday press conference to guarantee that the deficit would be capped at $10 billion.

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“The guarantees that we have put forward is that every year our debt-to-GDP ratio will continue to decline,” he said.

That’s a very different promise. And it’s possible for the debt-to-GDP ratio to drop even as the deficit exceeds $10 billion a year.

And, Trudeau promises that the budget will return to balance by the end of his mandate.

Whether Canadians who voted for a deficit will care exactly how many billions it is remains to be seen.


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