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Three Takeaways from Canada’s Federal Fiscal Update

On December 14, the Department of Finance released its first update of the economic and fiscal outlook since the Liberals returned to power in September with a minority mandate. Overall, the Update offered few surprises. The pace of fiscal consolidation is broadly in line with the 2021 budget, and there is little in terms of major new policy initiatives. Interestingly, most campaign promises were not incorporated, although these measures may be included in the 2022 budget.

In this commentary, we highlight three takeaways from the Update:

• The federal fiscal deficit is quickly returning to a more sustainable position. The deficit is projected to decline from 14.8% of GDP in FY20-21 to 5.8% in FY21-22 and 2.2% in FY22-23. At the same time, federal debt-to-GDP is forecast to peak this fiscal year at 48% and then gradually decline to 45% in FY25-26, 4 percentage points lower than previously expected.

• New spending, totaling $62 billion over six years, is focused on three issues: addressing COVID-19, compensation for First Nations families, and supporting the recovery in British Columbia. The Update, however, does not incorporate most election promises, which may be folded in to the 2022 budget.

• The Update does not meaningfully add fiscal stimulus in the current fiscal year, but it does not withdraw stimulus either. Overall, the fiscal stance puts the onus of inflation control on the Bank of Canada.

“The Update was largely as expected. Public finances are rapidly improving as the economy recovers and emergency spending is being wound down,” said Michael Heydt, Senior Vice President, Global Sovereign Ratings. “However, with most campaign promises not included in this Update, a key challenge for the government early next year could be how to deliver on election pledges in the 2022 budget without worsening inflation dynamics.”