PBO Forecasts Sharp Rise in Ottawa's Deficit, Jeopardizing Fiscal Anchors
The Parliamentary Budget Officer (PBO) projects a significant increase in Ottawa's deficit, potentially jeopardizing the government's established fiscal targets. The updated forecasts were released ahead of the Liberal government's fall budget scheduled for November 4th.
Updated Deficit Projections
Jason Jacques, Ottawa's fiscal watchdog, now anticipates a federal deficit of $68.5 billion this year, a considerable jump from last year's $51.7 billion. The PBO's report suggests that the federal debt-to-GDP ratio is no longer on a declining trajectory, challenging a key fiscal anchor previously relied upon by the federal government.
- The updated fiscal and economic outlooks provide parliamentarians with a baseline estimate of federal finances.
- The update does not factor in planned increases in defence spending to meet NATO's 5% of GDP benchmark by 2035.
- Nor does it consider Ottawa's announced plans to reduce public service spending over the next three years.
Economic Factors Contributing to the Deficit
The report attributes the rising deficit to a weakened economy, impacted by Canada's trade relations with the United States, which is dragging down Ottawa's tax revenue. Simultaneously, the Liberal government is increasing capital spending, further contributing to the deficit.
The PBO predicts slower real GDP growth, with projections of 1.2% in 2025 and 1.3% in 2026, down from the office's March outlook of 1.7% and 1.5%, respectively. Nominal GDP is projected to be an average of $12.9 billion lower from 2025 to 2029 due to the persistent impact of tariffs.
Government Response and Fiscal Anchors
Finance Minister François-Philippe Champagne attributed the higher deficit to global trade disruptions, stating, "With everything that's happened in the world, when you look at the deficit of Canada, a large part of that is in response to what has happened." He defended the government's investments in supporting workers and shifting the economy for future growth.
While Jacques has expressed concerns about the government's fiscal anchors, Prime Minister Mark Carney has maintained that they remain in place. Champagne reiterated that the Liberals' commitments to a declining deficit-to-GDP ratio and balancing the operating budget within three years serve as the government's fiscal anchors.
The PBO report indicates that the deficit as a share of GDP is expected to decrease through 2029-30, after expanding to -2.2% this fiscal year from -1.7% last year. The PBO forecasts deficits to remain close to $60 billion annually over the forecast horizon.
Debt-to-GDP Ratio and PBO Appointment
The PBO projects that total debt as a share of GDP will rise to 43% over the medium term from 41.7% last year, as deficits consistently exceed one per cent of GDP. Jacques was appointed as the interim Parliamentary Budget Officer on a six-month basis earlier this month.
