Yahoo Finance Canada's deficit could rise with slower population growth: Desjardins
Canada’s deficit and debt levels could be “much more substantial” than the 2024 federal budget projects if the government hits its targets for lower population growth in the years ahead, research from Desjardins says.
In a report published Thursday, Randall Bartlett, Desjardins’ senior director of Canadian economics, warns there is “downside risk” to various economic indicators because “Budget 2024 didn’t explicitly incorporate the planned reduction” in non-permanent residents (NPRs).
On March 21, in response to growing concerns about fast-rising population and consequent pressure on the housing market — Ottawa announced that it would seek to reduce the proportion of NPRs — a group that includes students, asylum seekers and temporary workers — from its current 6.2 per cent to five per cent by 2027.
Statistics Canada subsequently issued a range of population projections factoring in the government’s immigration policies. Calculations by Desjardins based on the middle population growth scenario show an annual deficit of around $39 billion — in the range of the federal budget’s downside projection and about $8 billion higher than the budget’s baseline.
“As such,” Bartlett writes, “the Budget 2024 downside scenario may provide a better basis for comparison than the current baseline for fiscal planning.”
Previous Desjardins models suggest a reduction in NPR numbers will slow real GDP growth and inflation, even as per-capita GDP growth and wages rise. Bartlett writes that lower real GDP growth would also mean lower nominal GDP growth — a current-dollar measure essential for a government’s tax revenue calculations. When nominal GDP grows more slowly than projected, the government’s bottom line should fall short of projections — pushing deficits and debt-to-GDP ratios higher.
“Of course, offsetting savings could be found by reducing spending,” Bartlett noted. “But this could be easier said than done.”
Without new sources of revenue, “the fiscal outlook could look worse still,” Bartlett writes, because of new spending on the horizon. He notes in particular Canada’s recent pledge to increase defence spending to two per cent of GDP by 2032.
“Even if this level of spending is gradually reached, it would add about 0.2 per cent of GDP to the deficit every fiscal year after 2025–26," Bartlett wrote. “That would make it more difficult for the federal government to achieve all of its fiscal anchors in the Budget 2024 baseline scenario, let alone the downside.”
John MacFarlane is a senior reporter at Yahoo Finance Canada. Follow him on Twitter @jmacf. Download the Yahoo Finance app, available for Apple and Android.
