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Canada’s deficit lower than expected but Omicron, B.C. floods eat into windfall

Click to play video: 'O’Toole takes aim at Canada’s economic update, rising inflation costs' O’Toole takes aim at Canada’s economic update, rising inflation costs
WATCH: O’Toole takes aim at Canada’s economic update, rising inflation costs – Dec 14, 2021

The Liberals have found themselves with a financial windfall amid an economic rebound, though the extra room is largely spoken for thanks to COVID-19 measures and relief for flooded British Columbia.

Finance Minister Chrystia Freeland‘s update released today shows that the deficit for this year is on track to hit $144.5 billion, below the government’s previous forecast of a $154.7 billion deficit.

The better-than-expected result is largely from new tax revenues that gave the government $38.5 billion in extra spending room.

But the update shows how quickly that extra room has been eaten up by $28.4 billion in new and preplanned spending since April’s federal budget.

READ MORE: Challenges fuelling Canada’s hot housing market will take ‘years’ to fix: Freeland

Among the measures are $5 billion to help British Columbia rebuild after devastating flooding and $4.5 billion to respond to the Omicron variant of COVID-19, including measures at the border and benefits for workers subject to a lockdown.

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There are millions more to improve ventilation in schools, libraries, hospitals and community centres, and a tax credit for companies that pay for upgrades.

There is $742.4 million set aside to help some 200,000 low-income seniors recoup drops in the value of their guaranteed income supplement payments after they received emergency aid last year. The payments are not expected to go out until next May.

Freeland told reporters ahead of the document’s public release that Tuesday’s update wasn’t the master plan for the Canadian economy going forward. That is coming in next year’s budget, she said.

It is in that document that the government could outline tens of billions of dollars in Liberal election pledges.

READ MORE: ‘Significant uncertainty’ making speed of Canada’s economic recovery tough to predict: government

Robert Asselin, senior vice-president for policy at the Business Council of Canada, said there are several big expenses on the horizon that could strain federal books in the coming years without a big bump in economic growth.

That would include paying for those Liberal campaign promises, the transition to a green economy, higher health-care transfers to provinces, as well as any new wrinkle in the COVID-19 pandemic.

“They’ve provided the support that was needed both on businesses’ side and on the income-support side,” said Asselin, a former budget chief for the Trudeau Liberals.

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“But they have also spent a lot of money that is not COVID-related, and that will be hard to sustain over time without huge growth.”

The economy has been on a roller-coaster ride since the onset of the pandemic, including a historic drop that sent the deficit in the last fiscal year to a record $327.7 billion.

That was lower than first thought because of higher tax revenues and after officials rejigged how much the government could pay out to First Nations children affected by the child welfare system. The government has now banked $40 billion — half for system improvements, and half to compensate victims.

After a recent upswing, the government now expects the economy to grow this year by 4.6 per cent.

READ MORE: Freeland to hold fiscal update virtually after staffers test positive for COVID

While growth is faster than expected in the next two years, it is expected to come back down to pre-pandemic levels once the crisis passes, which Asselin said may not be enough to pay for the $78 billion in new spending the Liberals promised on the campaign trail.

The unemployment rate in November almost reached its pre-pandemic reading of 5.7 per cent in February 2020. The Finance Department expects the country to get back to that rate in 2023 under the revised outlook.

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The outlook for inflation has also been revised up from the spring budget with the government expecting the consumer price index to increase 3.3 per cent this year, and 3.1 per next year, before coming back closer to the Bank of Canada’s two-per-cent target in 2023.

Despite that expected course correction, NDP Leader Jagmeet Singh said the Liberals should have done more to support struggling Canadians hit hardest by high inflation rate.

“Supports to people are something we can’t afford not to do. We have to put those in place,” he said.

Click to play video: 'Bank of Canada renews inflation target, Freeland says' Bank of Canada renews inflation target, Freeland says
Bank of Canada renews inflation target, Freeland says – Dec 14, 2021

Conservative Leader Erin O’Toole accused the Liberals of ignoring the rising cost of living, saying that as prices increase, so too does the amount of taxes federal coffers pull in.

“Canadian family budgets are strained to the max and Mr. Trudeau is benefiting from inflation,” O’Toole said.

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And Bloc Quebecois Leader Yves-Francois Blanchet chided the Trudeau Liberals for shutting the door on a provincial ask to increase health-care spending during, not after, the current health crisis.

Freeland had originally planned to deliver the update in person but made a cautionary change of plans after two members of her team had positive rapid antigen tests.

She told a virtual news conference the need to “drive economic growth and competitiveness” are imperative in a post-pandemic Canada.

“Climate change, housing, affordability, growth and competitiveness — these are things we are committed to working on,” Freeland said.

“But this is not a budget. And it’s not a mini-budget. Really, the intention here is a clear and transparent accounting of where the Canadian economy and Canadian finances are today.”

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