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Ottawa on track to miss deficit target, Desjardins warns

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Canada is unlikely to meet its deficit goals unless it makes substantial spending cuts or finds new sources of revenue, according to the country’s largest financial co-operative.

An “outsized pace of spending” means Canada is on course to run a budget shortfall of about $47 billion for the fiscal year that ends March 31, according to estimates released Thursday by Desjardins.

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The projection raises more questions about how Finance Minister Chrystia Freeland will meet her pledge to keep the country’s budget shortfall at around $40 billion a year from now until 2026.

“I think it’s going to be an exercise in creative accounting,” Randall Bartlett, Desjardins’ senior director of Canadian economics, who wrote the research note, said in an interview. “They either need to cut spending or increase revenues to make this work.”

A chorus of analysts and economists is warning that without tax increases or spending reductions, deficits are likely to rise amid slow economic growth.

I think it’s going to be an exercise in creative accounting

Randall Bartlett

That has led to concerns from business groups that Freeland will boost corporate taxes when she unveils her budget on April 16. However, that would open up the government to further criticism that it’s unfriendly to business, Bartlett said — and in any event, it wouldn’t help with this year’s fiscal crunch.

“That hasn’t been telegraphed and a retroactive tax on companies would be a hard sell — it’s not conducive to a stable and predictable investment environment,” he said.

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Instead, the paper suggests the government will unveil some “unexpected savings” to lower the deficit. It may also decide to sell assets, Bartlett said.

The government’s plan to launch a new program to help cover the costs of diabetes medication and birth control, along with potential increases in military spending, have yet to be accounted for, adding more risk to the fiscal outlook.

“Consistently running deficits to fund operating expenses, accumulating debt and pushing up against fiscal anchors puts Canada’s fiscal credibility and triple‑A credit rating at risk,” Bartlett said in the paper. Still, the country’s position remains “enviable” compared to other advanced economies, which have higher debt burdens and are running larger deficits.

“Canada’s one of the cleanest dirty shirts in the closet,” he said.

In a separate report released Thursday, economists at Toronto Dominion Bank also said that while the trend in expenditures suggests the government will run a deeper deficit this fiscal year, revenues are likely to be higher after better-than-expected economic growth at the start of 2024.

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“There is time for the government to iron out some of its fiscal loose ends,” economists Francis Fong and James Orlando wrote in a report to investors, adding that they ultimately expect the federal deficit to be $40 billion in 2023-24.

—With assistance from Derek Decloet.

Bloomberg.com

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