Liberal budget underestimates size of federal deficits, will lead to decades of higher debt: PBO

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The Liberal government’s 2021 budget underestimates the likely size of federal deficits by about $5.6-billion a year and puts Ottawa on a long-term path of higher debt, says Parliamentary Budget Officer Yves Giroux.

He issued two reports Wednesday, including one that looks at the broad assumptions in Finance Minister Chrystia Freeland’s April budget and another that focuses on a budget announcement to raise $2.1-billion over five years through higher tobacco taxes.

The budget projected the deficit for the 2020-21 fiscal year will be $354.2-billion, followed by a deficit of $154.7-billion this fiscal year and deficits that continue to decline in size through to 2025-26.

However, the Office of the Parliamentary Budget Officer (PBO) said it projects annual deficits that are $5.6-billion higher on average over those six years. The PBO said the government appears to be underestimating the cost of emergency programs such as the Canada Emergency Wage Subsidy and overestimating the economic stimulus impact of the new budget spending.

The PBO notes that while Ms. Freeland promised in her November economic statement that the 2021 budget would include up to $100-billion in stimulus measures, the new spending in the budget is not clearly broken down in terms of what costs are related to emergency support versus stimulus. The budget listed $101.4-billion in new spending over three years.

“We think the deficits are probably underestimated to the tune of about $5.6-billion per year on average, which normally would be a significant amount,” Mr. Giroux said in an interview. “But when you were talking about deficits upwards of $300-billion, that sounds small. But it’s not inconsequential.”

Mr. Giroux said the budget “lumped” new stimulus spending in with older spending announcements and extended spending on pandemic support programs.

“When you disentangle these types of measures, what you’re really left with is up to $69.2-billion in stimulus measures over three years,” he said.

The PBO also highlights a chart in the budget that shows the federal debt-to-GDP ratio will not return to prepandemic levels until about 2055. Mr. Giroux said this means Ottawa can’t afford major new spending over the coming decades without cutting elsewhere or raising taxes. That could have implications for Prime Minister Justin Trudeau’s pledge to eventually raise health transfers to the provinces.

Ms. Freeland’s press secretary, Katherine Cuplinskas, responded to the report by saying that the government’s fiscal plan is “prudent and responsible” and that Canada has the lowest net debt-to-GDP ratio in the Group of Seven.

Conservative MP and finance critic Ed Fast said the PBO report confirms his party’s concerns.

“This budget is not at all about generating economic growth or creating jobs for Canadians. It’s about pre-election spending to advance the partisan interests of the Liberal Party,” he said.

NDP MP and finance critic Peter Julian said the Liberals should be following the lead of the U.S. and other countries by including new taxes on the wealthy to offset the cost of pandemic-related spending.

“This is what makes the Liberal government’s refusal to have the ultrarich in this country pay their fair share of taxes incomprehensible,” he said.

In its related report on tobacco taxes, the PBO said it estimates a tax hike announced in the budget will raise $2.04-billion over five years, which is just shy of the government’s revenue estimate of $2.14-billion.

The spike in federal tobacco taxes, which was followed a few days later by a provincial hike in the British Columbia budget, was praised by health advocates as key step to reduce smoking rates.

Anne Kothawala, president and CEO of the Convenience Industry Council of Canada, an association that includes tobacco companies as members, said the tax increases won’t curb smoking unless the federal government increases enforcement to hit back at the contraband market.

Mr. Giroux said in an interview that there is a link between higher taxes and increased contraband, but that it is difficult to measure without a full understanding of Ottawa’s approach to addressing the illegal market.

The link between tobacco taxes and contraband was recently detailed in a December report by the Canada Revenue Agency, which estimated that Ottawa loses out on about $486-million a year because of uncollected cigarette taxes. The figure used 2014 data to estimate the “tax gap” on cigarette tax revenue.

The CRA report did not attempt to calculate the cigarette tax gap on provincial revenues, but it noted that the Quebec government has said it loses $125-million a year because of tax evasion in the tobacco industry.

Kelly Masotti, vice-president of advocacy for the Canadian Cancer Society, said the PBO report shows tobacco tax increases are “a win-win,” by both decreasing smoking and increasing government revenue.

In an interview, she said higher tobacco taxes are the most effective way of reducing smoking rates, particularly among price-sensitive youth, and she said contraband concerns are often overblown.

“We strongly support the federal tobacco tax increase as well as the B.C. increase,” she said in an interview.

Lesley James, senior manager, policy for the Heart and Stroke Foundation, also welcomed the PBO’s findings.

Ms. James said she would have liked to see a pledge in the federal budget to devote the $2.1-billion from higher tobacco taxes toward anti-smoking programs.

“We definitely need to reinvest this money into proper measures and help smokers who are addicted,” she said.

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