Federal Reserve forecasts exit from red ink as budget surplus expected if Canada avoids recession
OTTAWA—Government’s Autumn Economic Report (FES) returns to surplus despite improving Ottawa’s fiscal situation and adding targeted aid to Canadians hit by rising inflation said.
The FES is the government’s fall mini-budget, and under the government’s base-case official projections that assume the economy narrowly avoids a recession, the budget deficit for the next fiscal year ending March 2023 is $36.4 billion. is. The Federal Reserve predicts he will continue to narrow the deficit until he hits a $4.5 billion budget surplus in 2027-28.
However, with aggressive central bank rate hikes expected to lead to a recession, the Fed has put forward a downside scenario of a 0.9% recession in 2023. deficit, reaching $8.3 billion in 2027-28.
In the current fiscal year 2022-23, Congressional Budget Officer On Oct. 13, the deficit was projected to fall to $25.8 billion under the status quo policy.
The total FES 2022 measures will cost approximately $30 billion in additional costs over the forecast range ending in 2027-2028.
The government’s “fiscal anchor” is to eliminate COVID-19-related deficits and reduce the federal government’s debt-to-GDP ratio over the medium term. Its debt sustainability ratio is projected to decline from 46.5% in 2021-22 to 41.5% in 2026-27.
Given the rapid rise in interest rates, government interest expense is projected to grow beyond the forecast window from $34.7 billion over 2022-2023.
Federal debt is projected to grow from about $1.13 trillion in March 2022 to about $1.25 trillion in 2027-28.
The six-month doubling of GST credits announced on September 13 will cost the government $2.475 billion and is the largest single measure in the ‘Make Life More Affordable’ portion of the FES. is.
From 4 November, about 11 million low- and middle-income earners currently receiving GST deductions will receive additional payments, according to the government.
Also, interest on the federal portion of all Canadian student and apprenticeship loans will be permanently interest-free.
Nevertheless, Canada continues to have the most encouraging net debt forecast among the G7.
Chancellor Chrystia Freeland told the House of Commons, “The Bank of Canada is fighting inflation, but we don’t want to make that job harder.” She added that the Fed expects the deficit to fall to 1.3% of Canada’s $2.8 trillion economy.
Government officials said the spending measures at the FES would not contribute to additional inflation. As a rule of thumb, program spending of 1% of GDP contributes 0.2% to inflation, and if the economy is growing at a rate of 3-4%, he can generate $15 billion without accelerating inflationary pressures. he said he could spend
“We are doing much less than that,” he said, adding that inflation will only have an impact if spending is increasing as a share of GDP.
stock acquisition tax
One move rumored before the FES announcement was that the government intended to tax share buybacks. The Federal Reserve is planning to impose a 2% tax that will apply to the net value of all types of stock buybacks by Canadian public corporations.
This is similar to the measures introduced in the United States, and details of the new tax will be announced in the next budget and will go into effect on January 1, 2024. 2023-24.
Share buybacks are one way to return corporate profits to shareholders, and this is how oil and gas companies have rewarded investors at a time when energy prices have skyrocketed. hindered.
Freeland told reporters, “The United States introduced the same tax with the Inflation Control Act.
“I think this is a smart tax … more importantly, [than the fiscal impact] Create the right set of incentives [for companies]”
Officials have called the U.S. Inflation Reduction Act a ‘game changer’ for reshaping the U.S. industrial structure and attracting investment capital, obliging Canada to respond accordingly to remain competitive. I said yes.
Freeland said this was “a truly optimistic moment for our country” in this time of economic uncertainty, and said no country was better positioned to weather the global economic slowdown than Canada.
“Canada’s financial situation is perfectly sound and Canada will weather this very well.”