Canada's Parliamentary Budget Office Warns Of Persistent Deficit

by Mike Godfrey, for LawAndTax-News.com, Washington

24 July 2009

A report released by Canada's Parliamentary Budget Office has suggested that the economy is likely to remain in debt for the next five years, contradicting more optimistic government predictions with regard to the projected speed of the country's economic recovery.

The report observed that:

"The global economy is in the midst of the worst economic downturn since the Second World War. Both developed and emerging economies have seen dramatic reductions in economic activity. Most important for Canada, the sharp contraction in the U.S. economy has been led by large declines in a number of sectors that are of particular importance to Canadian exporters."

It continued:

"Reflecting, in part, the weakness in global demand, commodity prices have declined sharply since peaking in mid-2008, resulting in a significant contraction in Canadian nominal gross domestic product (GDP) – the broadest measure of the Government’s tax base. Based on the June 2009 PBO survey of private sector forecasters, the outlook for nominal GDP is substantially lower than the Government’s risk-adjusted projection in Budget 2009; as well, the outlook for the unemployment rate is significantly higher than expected at the time of Budget 2009."

The PBO went on to reveal that it was projecting cumulative budgetary deficits of CAD155.9 bn over the 5-year projection period 2009-10 to 2013-14, with the budget deficit expected to peak at CAD48.6 bn (3.2% of GDP) in 2009-10, improving to CAD16.7 billion (0.9% of GDP) by 2013-14.

Explaining their projections, the report's authors observed that:

"Although there is a high degree of uncertainty surrounding estimates of potential output and structural budget balances, PBO’s calculations suggest that the budget is not structurally balanced over the medium term. That said, the structural deficits projected in 2012-13 and 2013-14 are small relative to the size of the economy. PBO judges that the risks to its fiscal outlook are roughly balanced in the near term. However, the balance of risks to the medium-term fiscal outlook is tilted to the downside."

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