Posthaste: Canada's finances on 'precarious path' as economy slows

financialpost.com:

Forecasts are being cut as Canada’s economy groans under the weight of higher-for-longer interest rates.

With third-quarter GDP expected to miss what the Bank of Canada and others were predicting just months ago, the bleaker outlook threatens to hit not only Canadians in their pocketbook — but their government as well.

“This souring of the economic outlook doesn’t bode well for the Government of Canada,” says Randall Bartlett, Desjardins’ senior director of Canadian economics, in a recent note.

Bartlett said two things stood out in July’s Fiscal Monitor, the monthly accounting of federal finances. Revenues were coming in at half the pace expected in the government’s 2023 Budget, as corporate income and sales taxes fell, and program expenses were growing at double the pace because of higher operating expenses and other transfer payments.

At the same time public debt charges are rising.

“Taken together, federal finances are tracking a worse annual outcome than at this time last year,” said Bartlett.

Then there are the extra expenses that have happened since the July accounting, such as a wage increase for the federal public service and higher subsidies for electric vehicle and battery plants in Ontario.

And federal finances could get even worse, says Bartlett.

If the government doesn’t generate the revenue or savings from measures outlined in its Budget, deficits could be larger by an average of about $5 billion annually, he said. “This would put the debt-to-GDP ratio on a higher, albeit still eventually falling, track.”

Dejardins’ analysis figures the government still has a cushion of about $13 billion a year while keeping the debt-to-GDP ratio from rising, but that doesn’t account for other recently announced measures.

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