Finance Minister Chrystia Freeland is set to give the government’s outlook for the economy and its own spending plans in the fall economic statement on Thursday as inflation stays hot, interest rates rise and rumblings of recession grow louder.
While Freeland has promised to share a fiscal forecast with “some precision” about the storm clouds gathering on the horizon, experts who spoke to Global News expect the government will “hedge” its bets and avoid big spending commitments heading into uncertain economic times.
Here’s what to know as the feds prepare to chart a course through choppy economic waters.
How are the government’s finances today?
Heading into the fall fiscal update, the government’s books are “looking very good,” according to Randall Bartlett, senior director of Canadian economics at Desjardins.
The government’s actual deficit for the 2021-22 fiscal year was much improved from the feds’ own projections. In the spring budget, the feds expected a deficit of $113.8 billion for the last fiscal year, but actual figures from Public Accounts Canada released last week came in at $90.2 billion.
Desjardins expects the federal deficit will continue to shrink down to $20.6 billion for 2022-23 — well below Ottawa’s $52.8 billion deficit forecast in Budget 2022. The Parliamentary Budget Office also recently forecast a reduced deficit of $25.8 billion.
Bartlett says that while some of the improved picture is thanks to lower government spending, a great deal of the boost is thanks to higher tax revenues.
The government has a perhaps unlikely source to thank for the rosier fiscal position — rampant inflation.
As inflation pushes up the costs of goods, the government derives greater revenues from taxes as a portion of those sales.
In response to inflation — and not to mention Canada’s tight labour market — workers have also been bidding up their wages from employers to offset the higher cost of living. This, too, fuels government revenues through greater income tax proceeds.
But Bartlett warns that inflation is not necessarily a cure-all for government deficits.
“What inflation giveth, it ultimately taketh away,” he says.
As the Bank of Canada moves to fight inflation, it raises interest rates to increase the cost of borrowing and take steam out of the economy. This will ultimately become a drain on the government’s finances, not a boost, as unemployment rises and more Canadians shift from paying federal income taxes to leaning on programs such as employment insurance, Bartlett says.
Canadians are not the only ones dealing with the impact of higher interest rates — the feds must factor the higher cost of borrowing into their projections as well, notes Moshe Lander, economics professor with Concordia University in Montreal.
With “sizeable debt” on the books, Lander says the federal government will be forced to renew the terms on its own loans at today’s higher rates.
Putting this together, the months ahead could see the feds’ revenues diminish and go more towards paying off interest than principal debt — a situation many homeowners renewing their mortgage might find familiar as inflation stretches their budgets and interest rates rise to their highest levels in more than a decade.
“That raises the cost of borrowing for everyone — including the government,” Lander says.
While Desjardins forecasts a smaller-than-expected deficit this fiscal year, it is calling for a return to higher deficits in the coming budgets as the government faces higher spending program demands amid a possible recession.
Will the government forecast a recession?
The chorus of economists and market watchers calling for Canada’s economy to tip into a recession next year has been growing for months, but experts who spoke to Global News expect the federal government will play it safer in the fall economic statement.
Desjardins is among those calling for a recession in 2023. But Bartlett says he sees Freeland laying out three possible scenarios in the document: an average based on the consensus of economists polled across the country, and a worst-case and best-case scenario above and below that.
Lander similarly says he thinks the federal government will “hedge” its bets on a possible recession, but adds the Liberals will likely be wise to do so, rather than inadvertently tip the economic scales towards a downturn.
“You never want to say that a recession is coming. That in itself can become a self-fulfilling prophecy,” Lander says.
“If you have the government that’s ringing the alarm bells saying we’re doom and gloom, that translates into anxiety … Then if everybody quickly reins in their spending and starts preparing for recession, then you trigger a recession.”
He says careful readers of the fall economic statement should look instead for “euphemisms” about “slowing growth in 2023” to parse the feds’ concerns about looming hardship.
What new spending might be announced?
With expectations the feds will keep their economic projections close to the chest, experts also say there will likely be little announced about new measures to support Canadians ahead of a possible recession.
Citing two senior government sources, Reuters reported last week that Ottawa’s update could see some targeted spending, but will avoid measures that could further spur inflation and consumer demand.
Expect the document “to chart a responsible course, investing in targeted ways in Canadians while retaining fiscal firepower for whatever challenges that may emerge in the world,” a senior source familiar with the drafting told Reuters.
Lander says the government could present a framework that acknowledges “dangerous economic times ahead” and holds back on any major spending plans until the spring’s full federal budget.
By that time, the government will have a clearer picture of how the Bank of Canada’s interest rate hikes have worked to slow the economy and where gaps need to be shored up for support, he says.
The government is otherwise likely to “play up” already announced programs — doubling the GST credit and the introduction of a dental care bill in the House of Commons — rather than announcing new spending, Lander adds.
Both Bartlett and Lander say the government will have a difficult job in this fiscal update to both placate concerns that it’s not doing enough to support Canadians and avoid contributing to inflationary pressures.
“It’s a very fine line that the federal government needs to walk in this fall economic statement,” Bartlett says.
He says he’d like to see some mention of restructuring to the Employment Insurance program in the update, as well as some investments in automation and digitization to boost small business productivity and remedy snarls in Canada’s supply chains.
Speaking to a Senate committee Tuesday, Bank of Canada Senior Deputy Governor Carolyn Rogers also mentioned supply chains as an area where Ottawa could invest to offset the impact of inflation without working counter to the central bank’s efforts.
But both she and Governor Tiff Macklem made it clear that while the feds’ spending plans can complement their own efforts, government policy cannot reduce the need for further interest rate hikes to come.
“We need to do our job, other policymakers need to do their job,” Rogers said.
— with files from The Canadian Press and Reuters