Expect smaller budget deficits in fall update: RBC

The federal government should take advantage of strong economic growth and a smaller-than-expected 2016-17 budget deficit to reduce deficit-financed spending when it issues its fall economic statement next week, a research note from RBC says.

Finance Minister Bill Morneau will deliver his fall fiscal update on Oct. 24. Budget 2017 projected a $28.5-billion deficit for this fiscal year, with deficits projected through 2021-22.

But Department of Finance numbers showing a $17.8-billion deficit in 2016-17, more than $5 billion smaller than estimated, combined with stronger-than-expected growth and higher interest rates, mean the projected deficit for the current fiscal year could be $10 billion smaller than the budget projection, RBC says.

“The big question is whether the government will choose to spend some, or all, of this fiscal dividend,” the research note says.

On Monday, the Liberal government promised to cut the small business tax rate to 10% in January and 9% in 2019 in a move to undo some of the damage caused by its proposed tax reforms for private corporations. The move is expected to cost $2.9 billion over the next five fiscal years.

Rather than announcing more new spending measures, RBC says the feds should put a plan in place to eliminate the deficit. With the “economy near full capacity, any fiscal stimulus is likely to be inflationary,” RBC says. Using the improved fiscal situation to move toward a balanced budget would leave the government room to respond if the economy were to deteriorate.

Read the full research report here.

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