Counting In Canadian Budgetary Deficit Projections and Adjustments

On the bad news side, federal and provincial government revenues fell further in the second quarter of 2009, down 4.7% and 1.7% respectively, and our short term anticipated budgetary deficits will be significant, particularly in 2010, to pay for the fiscal stimulus required to manage through the crisis.

But it turns out that Canada has met a significant milestone through it all: our relatively strong fiscal position has reduced our dependence on foreign borrowing. As a result our net foreign debt (the difference between our liabilities to the rest of the world and the foreign assets we own) has gone down rather dramatically. In fact, Canada was in a net international asset position for the first time in 80 years in the fourth quarter of 2008. The bonus for us is that this phenomenon has lowered our exposure to global financial market shocks.

Further, roughly half of the downward adjustments to the economic outlook of the private sector forecasters since the January 2009 federal budget has already been accounted for in budget-planning assumptions.

A deficit of $3.9 billion is now projected for 2008ñ09 and a whopping $50.2 billion in 2009ñ10. Does that mean more taxes in the short term? Likely. According to the Department of Finance, more than half of the 2009ñ10 deficit is the result of temporary measures under Canada's Economic Action Plan, less taxes collected, higher EI benefits, and the decision to freeze EI premium rates. A prolonged recovery could require action; for example the ìunfreezingî of EI premium rates, which would increase costs to employers and employees at a time when increased purchasing power and savings rates are desired.

The remaining deficit of $23.2 billion, or 1.5 percent of GDP, is primarily a reflection of the weak economy and is anticipated by government to be reversed as the economy recovers. [1] Will it recover fast enough to avoid tax hikes?

No one is really quite sure yet. The bottom line for now is this: we're in pretty good shape all things considered. In fact, the International Monetary Fund (IMF) in its April 2009 publication World Economic Outlook has stated that it expects Canada to experience the smallest contraction of all G7 countries in 2009 and the strongest recovery going into 2010. See chart that follows.

Looking ahead, most private sector forecasters have not changed their views since the January budget and continue to point to a sustained economic recovery beginning in the second half of 2009 and gaining momentum in 2010. See chart that follows.

However, we are not entirely out of the woods. The reality is that as a trading economy, our recovery ìis highly dependent on a sustained recovery in the global economy, in particular in the United States. The global economic recovery, in turn, cannot fully materialize until dislocations in global financial markets are fully resolved and these markets are fully functioning.î[2]

Therefore, it stands Canada in good stead to continue to work hard in the upcoming meetings together with the G20 Finance Ministers and their Central Bankers in their established process for managing the recovery of the global financial systems.

The following chart updates the government's summary of new forecasts for 2009; stay tuned for new numbers as we head into year end 2009:

All of that should be reason for Canadian investors to celebrate.

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