Federal economic and fiscal update for Canada

Federal Finance Minister Bill Morneau provided an update this morning of the government's view on the economic and fiscal outlook for Canada.

Real output growth is expected to come in at 1.2% this year, and 2.0% next, a downward revision of 0.8 and 0.2 percentage points respectively, relative to the April budget. More importantly for government revenues, nominal growth has been revised down by approximately 0.8 percentage points for both 2016 and 2017.

The weaker economic outlook is expected to result in deterioration in future budget balances of about $6.0 billion (0.4% of GDP). This translates into a $3.0 billion deficit for fiscal year 2015-16, and a $3.9 billion deficit in 2017-18 (0.2% of GDP). A modest surplus of $1.7 billion (about 0.1% of GDP) is expected for fiscal 2019-20, four years later than expected in the April budget.

Assuming that budget deficits of $10 billion (as promised in the Liberal platform) will be completely additional to today's starting point, near-term deficits of between $13 billion and $14 billion can be expected when Budget 2016 is announced. At approximately 0.7% of GDP, these deficits appear manageable.

"Infrastructure spending should help to boost near-term growth, reducing the fiscal impact of budgets somewhat. Based on currently available information, we expect this spending to boost 2016 and 2017 GDP growth by as much as 0.1 and 0.3 percentage points respectively", says TD Economics.