Thoughts

February 16, 2024 | 16:13

Dawn of the Budget Season

Economist

Robert Kavcic

Senior Economist and Director
Economics

Robert has been with BMO Capital Markets since 2006. He plays a key role... (Read more)

Robert Kavcic

Senior Economist and Director
Economics

Robert has been with BMO Capital Markets since 2006. He plays a key role... (Read more)

Fiscal nerds, restrain yourselves. The 2024 Canadian budget season is set to get underway with British Columbia first out of the gate on February 22nd, teeing off what should be a fairly muted set of fiscal plans. Current economic conditions, the political backdrop and overall state of Canadian government finances suggest that we’re in for a largely steady-as-she goes budget season which, by the way, is hardly a bad thing.

Government finances come into the season in pretty good shape, with the fall fiscal update season having yielded few major surprises. The combined provincial budget deficit is currently estimated at a modest $9.7 billion for FY23/24, or 0.3% of GDP. While that marks a deterioration from two consecutive surpluses averaging just under $8 billion in the two prior fiscal years, the books are at or near balance for most. The majority of provinces also carry net debt burdens at 38% of GDP or lower; in some cases, much lower (Chart 1). The federal deficit for FY23/24 is currently pegged at $40 billion, or a chunkier 1.4% of GDP, with policymakers still not shy about spending.

Ottawa’s latest fiscal monitor shows monthly budget flows falling behind a year ago, which could open some risk to the deficit estimate for FY23/24 and beyond. This would mark a shift from a few years of perennial upside fiscal surprises in Canada. At the provincial level, the combined fiscal balance exceeded budget expectations by an average of almost $50 billion per year between FY20/21 and FY22/23, or a hefty 2% of GDP. FY23/24 is tracking very incrementally ahead of expectations. This isn’t bad news, per se, but the steady stream of good news is probably behind us. Part of the reason is that finance departments had been conservative with their economic assumptions. While 2023 held up much better than expected, most are now seeing 2024 growth fade below prior plans.

On the spending side, higher debt service costs and public-sector wage bills are going to add pressure. Higher bond yields continue to filter through into higher debt service costs, with the provincial total now tracking roughly $5 billion higher than pre-pandemic levels. The better news is that we expect Bank of Canada rate cuts in the second half of the year, and debt service costs are still just 6% of revenues or a full point below prepandemic levels. Splash spending announcements might be fewer and further between, and even Finance Minister Freeland hinted at “acting in such a way that creates conditions that will make it possible for interest rates to come down”—let’s assume that means less inflationary fiscal stimulus. This year’s election calendar is also pretty thin with B.C., New Brunswick and Saskatchewan on deck in the fall.

Finally, the provinces should remain active borrowers, with the balance likely stable, capital spending demands still strong and maturities holding relatively steady. The group is on pace to borrow $92 billion this fiscal year, with a few provinces (ON, B.C., SK) already pre-borrowing meaningful amounts for the upcoming fiscal year. On the credit-rating front, we’d flag Ontario as ripe for an upgrade if the province lays out a strong budget; while Manitoba and B.C. have been losing some goodwill on that front.