Federal deficits could total almost $200 billion over next five years

The federal government has repeatedly shifted the goal posts on its own “fiscal anchors.” This bulletin examines the robustness of the current “fiscal anchor” to reduce the debt-to-GDP ratio by the government’s first mandate.

The 2016 federal budget confirmed the government’s plan to run long-term deficits–$113.2 billion over the five-year plan. Budget 2016 increases program spending by 7.6% in 2016/17, following a 6.7% increase in 2015/16.

A closer look at the government’s spending plan reveals a major slowdown in spending growth during the last three years. Specifically, the federal government is proposing to reduce spending as a share of the economy and per-person spending (inflation-adjusted) from 2017/18 to 2020/21. Decreasing the size of the federal government does not square with the government’s view that government spending drives economic growth.

Using three alternative spending scenarios from 2017/18 to 2020/21, we estimate the potential impact on the five-year deficit plan and debt-to-GDP assuming:

• Program spending increases at the rate of population growth plus inflation
• Program spending increases at the rate of economic growth
• Program spending increases by 6.0% annually (the average growth rate of first two years of the 5-year budget plan)

We estimate that over the course of the government’s fiscal plan the cumulative federal deficit could reach up to $196.0 billion. We find that the debt-to-GDP ratio under three different spending scenarios would be greater in 2020/21 than in 2015/16. The federal government is therefore unlikely to meet its latest target of reducing the federal debt-to- GDP by the end of its first mandate.