Moderate economic growth ahead as Government unlikely to meet budget target, says PBO
Ottawa (Ontario), October 17, 2024
The Parliamentary Budget Officer (PBO) today released his Economic and Fiscal Outlook (EFO). The report provides a baseline projection to help parliamentarians gauge potential economic and fiscal outcomes under current policy settings.
PBO projects growth in the Canadian economy to remain tepid through 2024, with real GDP growth advancing by 1.1 per cent, and the unemployment rate hovering just below 7 per cent for the rest of this year.
“As the impact of Government spending tapers off and elevated interest rates continue to put pressure on consumer spending and business investments, we expect economic activity to slow over the remainder of the year”, says Yves Giroux, PBO. “Real GDP growth will rebound to 2.2 per cent in 2025, as the Bank of Canada continues to lower borrowing costs, boosting spending and investment, and exports pickup”.
Over 2027 to 2029, PBO projects real GDP growth to average 1.9 per cent which is slightly higher than our estimated growth in potential output (1.8 per cent) over the same period.
The PBO outlook includes measures announced by the Government in Budget 2024 and through August 31, 2024. For the previous fiscal year, 2023-24, we estimate the budgetary deficit to be $46.8 billion (1.6% of GDP) and the federal debt-to-GDP ratio to rise to 42.2%.
“Based on our analysis, the Government will not meet its fiscal commitment to keep the deficit below $40 billion in 2023-24”, says Mr. Giroux.
“Excluding any potential new measures or announcements, the deficit is projected to marginally decline to $46.4 billion in 2024-25 while the federal debt-to-GDP ratio remains at 42.2%. Under status quo policy, the deficit is projected to decline over the medium term, falling to $23.8 billion (0.7% of GDP) in 2028-29,” adds Mr. Giroux.
Compared to PBO’s March outlook, projected budgetary deficits are roughly $4.1 billion higher, on average, over the next five years. This deterioration is due to new spending measures.
The PBO report highlights risks and uncertainty surrounding the outlook. Setting aside new measures that are likely to be announced between now and the next federal election, the risks to the PBO baseline economic and fiscal projection are roughly balanced.
“In terms of downside risks, we continue to judge that the most important risk is a larger-than-expected impact on the Canadian economy, including housing, from the Bank of Canada’s restrictive monetary policy, which would negatively affect the Canadian economy and federal finances,” highlights Mr. Giroux. “Stronger-than-expected household spending is the most important upside risk”.
Quotes
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As the impact of Government spending tapers off and elevated interest rates continue to put pressure on consumer spending and business investments, we expect economic activity to slow over the remainder of the year. Real GDP growth will rebound to 2.2 per cent in 2025, as the Bank of Canada continues to lower borrowing costs, boosting spending and investment, and exports pickup.
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Based on our analysis, the Government will not meet its fiscal commitment to keep the deficit below $40 billion in 2023-24.
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Excluding any potential new measures or announcements, the deficit is projected to marginally decline to $46.4 billion in 2024-25 while the federal debt-to-GDP ratio remains at 42.2%. Under status quo policy, the deficit is projected to decline over the medium term, falling to $23.8 billion (0.7% of GDP) in 2028-29.
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In terms of downside risks, we continue to judge that the most important risk is a larger-than-expected impact on the Canadian economy, including housing, from the Bank of Canada’s restrictive monetary policy, which would negatively affect the Canadian economy and federal finances.