At the time of year when the federal government’s Fall Economic Statement has been previously released, economists note that lower immigration targets will weigh on growth while stressing the importance of sound fiscal policy.
RBC’s Assistant Chief Economist Cynthia Leach and Economist Rachel Battaglia released a report Tuesday, highlighting changes that have occurred since the release of the federal government’s 2024 budget in April.
The economists are predicting upward pressure on the federal deficit through tracking of the 2024-25 fiscal plan, adding that issues like affordability, productivity growth and unemployment present greater risks to federal governments’ bottom line going forward.
“Lower population growth means lower total consumption and employment growth for the economy as a whole in the years ahead, restraining the expansion of the tax base and government revenues,” the report said.
“These changes will shave nearly one percentage point off economic growth over the next three years compared to our previous projections, negatively affecting the budgetary balance by a cumulative $50 billion over five years starting in 2025.”
However, the economists said that other factors will “partially offset” the negative impact, specifically lower borrowing costs than planed in the 2024 budget. The economists estimated that economic developments since April will reduce around $20 billion from the budgetary balance during the forecast horizon.
“However, lower-trend population growth will be an ongoing fiscal drag, because it pulls growth from the entire economy,” the economists said in the report.
According to the report, fiscal prudence needs to be a top priority for the government when navigating current economic circumstances. The report highlights a number of positives regarding Canada’s fiscal position, like its triple-A credit rating providing lower borrowing costs.
“However, Canada is not a golden child and invincible to the shifting economic and market winds. Its gross debt level is high and more than half of it is held by provinces (which largely continue to deficit spend aggressively),” the report said.
“Fiscal credibility has suffered with successive, major new structural program spending, deficit-financed even during the expansionary phase of the economic cycle, and weak fiscal anchors.”
Trade volatility
The economists also noted that the incoming Donald Trump administration in the U.S. adds volatility to the Canadian economic and fiscal outlook, saying that most of his campaign promises “would be negative for growth in Canada.”
“Increased tariffs on Canadian imports to the U.S. would be a significant drag on demand for Canadian-made goods, while lower U.S. personal and corporate tax rates would undermine Canada’s tax competitiveness and investment prospects,” the report said.
However, the economists noted the degree of the challenges posed by U.S. President-elect Trump remain unclear.
“U.S. policy is also likely to dictate Canadian government spending priorities. Greater defence spending and more border patrol appear necessary for the Trump administration to reconsider tariffs, adding weight to Canada’s bottom line if we want to remain within the U.S. trade tent,” the report said.