Thoughts

November 22, 2024 | 14:20

Eat, Drink & Be Fiscally Wary

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)

This week’s policy announcements from Ottawa are discussion-worthy, to say the least. While policymakers have been searching for an effective response to Canada’s ‘productivity emergency’ and ‘affordability crisis’, some might consider the latest measures as just a two-month spree of cheaper booze and video games, funded in part by a cheque from Ottawa. We won’t go that far, but point taken.

The $6.3 billion total cost of a two-month GST/HST holiday on items like restaurant bills, booze and toys ($1.6 billion), and a $250 cheque for those with 2023 net income under $150k ($4.7 billion), will add stimulus to the economy as we move into the first quarter. Combined with a previously-announced cash rebate in Ontario ($3 billion), and with Ontario and Atlantic Canada also suspending their HSTs, the net overall impact on the Canadian economy pushes above $11 billion, or roughly 0.3% of GDP. That is hefty. But, it will do little to change economic behaviour, or even touch the aforementioned issues of productivity and affordability in comparison to, say, something like permanent income tax reductions. In fact, when set against an incoming U.S. administration that is gearing up for a significant pro-growth policy push, it seems like energy would be better spent on measures with a more lasting impact.

What these changes will do, however, is immediately put a bigger hole in Ottawa’s fiscal balance, which has already been falling behind plan. We have yet to see a Fall Economic Statement from the federal government, which serves as a mid-year refresh of the budget situation. Even before the announced measures, there was downside risk building for the fiscal outlook. In the twelve months through August, Ottawa’s rolling budget deficit was $57 billion, versus $40 billion estimated for FY23/24 and the $39.8 billion forecast for FY24/25. While there is some upside from a firmer-thanexpected economy and a faster Bank of Canada easing cycle, spending continues to push higher. Note that the Parliamentary Budget Office estimated a $46 billion shortfall for FY24/25 in its October update, which was already $6.6 billion deeper than the budget plan before this week’s announcement. As such, we could easily see the federal deficit push well above $50 billion this year.

At the provincial level, mid-year fiscal updates have been rolling out on schedule, and the results have been more encouraging. Ontario’s $3 billion handout was fully funded by an improved underlying revenue backdrop, and the budget deficit is tracking at $6.6 billion, or $3.2 billion better than in the 2024 budget. With respect to the HST change, Ontario and Atlantic Canada will likely see some fiscal impact as well, although some have already carved out the tax from a few items in the list. Quebec’s update came largely in line with the budget plan, while Alberta’s surplus widened to $4.6 billion. That leaves the combined provincial deficit at $22 billion (0.7% of GDP) this fiscal year, or about half Ottawa's—the provinces overall are still in pretty good shape.