As anticipated, the federal government announced that budget deficits of about $30bn (1.5% of GDP) are in store. This is about $11bn higher than revealed in the February Update.
• The larger deficits relative to the Update largely reflect the implementation of commitments outlined in last year’s election campaign. Chief among these promises are additional infrastructure spending, changes to employment insurance and support for indigenous peoples. However, speculation that capital gains taxes would be raised did not materialize.
• Deficits of more than 1% of GDP persist for the next several years, but the federal debt burden remains relatively low and stable. Revenue projections include a sizeable margin of prudence, appropriate in light of the longer-term headwinds to Canadian growth.
• Recent weeks have seen calls to run even larger deficits to support economic growth. We feel that the moderate deficits announced today strike a good balance between injecting short-term stimulus, generating long-term benefits through infrastructure enhancement, and maintaining a credible longer-term fiscal path.
• Given that today’s announcements were fairly well telegraphed in advance, we expect little market reaction. In terms of economic impact, we calculate that the blend of transfer payments, tax changes, and additional infrastructure spending will deliver a boost to the economy of about 0.1 percentage points this year, rising to 0.3 in 2017. This does not represent a massive game changer, but does provide a nice boost to an economy that appears to be increasingly benefitting from rising exports. All told, today’s budget is consistent with a growth outlook that will see the Bank of Canada on hold well into 2017.
Thank you TD Bank for your insight.