April 01, 2022 | 13:34
Ottawa’s Budget 2022: Preview
Canada’s federal government will table the FY22/23 budget on April 7th, with the minority Liberals now holding an agreement with the NDP for support until 2025. That, along with a better underlying fiscal situation, leaves a clear path for the government to continue pushing ahead with its policy priorities, many of which overlap between the two parties.
On the fiscal situation, Ottawa estimated deficits of $144.5 bln (6% of GDP) for FY21/22 and $58.4 bln (2.3%) for FY22/23 in its December fiscal update, but there appears to be room for improvement in those numbers. Monthly tracking of revenue and spending show that FY21/22 is coming in much better than expected, with the 12- month deficit through January (the fiscal year ends in March) at $122 bln. These figures don’t always align with public accounts, but there is meaningful upside considering the final two months of the fiscal year will likely look better than those of a year ago. Meantime, the PBO’s latest estimate from early March showed more than $10 bln of upside for this fiscal year. Indeed, given our current outlook for the economy, in particular nominal GDP growth, we appear to be running closer to the ‘faster recovery’ scenario outlined in the December update, which would have the deficit tracking about $6 bln better than previously outlined. However you want to spin it, the underlying fiscal situation looks better than expected.
Will that translate to a much better fiscal path? Possibly not, especially given new spending demands coming out of the Liberal-NDP agreement. Recall that the Liberal platform accounted for roughly $18 bln of new spending for FY22/23 across a myriad of priority areas. While spending was lifted in the December fiscal update, a lot of it was situational to deal with issues like COVID and flooding, so more policy-based measures are certainly coming. Areas like national dental and pharmacare, which fall under the NDP agreement, will have large price tags. And, defence spending could get a notable boost. On the tax front, we should see at least a few measures rolled out as the Liberal platform estimated more than $4 bln in new revenues for FY22/23. A pair of proposed taxes on large financial institutions, if enacted, would likely be the biggest ticket item, at a take of around $2.5 bln per year.
All told, it looks like this budget could forego an opportunity for significant fiscal consolidation, in exchange for continued spending and tax increases. Fundamentally, this could raise questions of appropriateness and credibility. First, its highly questionable if continued new spending is at all warranted at this stage of the cycle, with the economy clearly pushing against capacity constraints, and the Bank of Canada now actively battling persistently high inflation. Counterintuitively, some provincial governments are currently rolling out stimulative measures to counter inflation. Also, from a credit perspective, recall that Ottawa laid out a set of fiscal guardrails in the 2020 Fall Economic Statement, to assure that there would be some medium-term fiscal anchoring by guiding a return “to a prudent and responsible fiscal path”. As we head into the 2022 budget, each of the employment rate, total hours worked and the unemployment level (the three “data-driven triggers” identified by Ottawa) have indeed fully recovered, but any mention of those guardrails has recently disappeared. With that, some will be looking for a credible, sustainable medium-term fiscal path.