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Weekly Commentary

The Federal Deficit Will Be Larger than Expected This Year but Is Far from a Debt Spiral

February 2, 2024
Randall Bartlett
Senior Director of Canadian Economics

It’s that time of the year again when economists sharpen their pencils in preparation for government budget season. Some provinces have already announced release dates. But the federal government tends to wait until the last minute to announce a publication timeline, typically in late March or early April. And we expect this year will be no exception.


Fortunately for federal fiscal watchers, the Government of Canada publishes a monthly Fiscal Monitor, which gives a year-to-date tally of how federal finances are evolving. The latest, published the last Friday of January, is for April through November 2023. It concluded that the fiscal-year-to-date budget deficit of $19.1B was substantially larger than the deficit over the same period the previous year, which clocked in at $3.6B. The biggest driver of the larger deficit is program expenses, which grew 6.3% over a year earlier (graph 1). In contrast, the 2023 Fall Economic Statement (FES) projected program expenses to climb by just 0.8% in the 2023–24 fiscal year. The problem most fundamentally is that the federal government baked significant savings into the outlook for Direct Program Expenses (DPE) that have not yet materialized. While the FES 2023 assumed an 8.1% year-over-year decline in DPE, the Fiscal Monitor has shown a 5.2% advance year-to-date. This is worrying, as DPE is the cost of operations over which the Government of Canada should have the most control and from which it expected to find significant savings.

Of course, there’s more to a budget deficit than just program expenses. Revenues are coming in moderately better than expected due primarily to higher personal income taxes (PIT), Goods and Services Tax revenues and Employment Insurance premiums. However, public debt charges—the cost of servicing the federal debt—are also growing more quickly than anticipated in the FES 2023. Taken together, this suggests that if the growth in revenues and expenses currently estimated in the Fiscal Monitor persisted for the full fiscal year, the deficit would balloon from $35.3B last year to $62.4B in the current fiscal year (graph 2). That’s substantially greater than the $40.0B deficit projected for the 2023–24 fiscal year in the FES 2023. Higher program expenses, and DPE specifically, are almost singularly responsible for the erosion of the federal fiscal forecast. As such, the federal government can’t blame its deteriorating fiscal position on a weak economy.

That said, we don’t think the federal deficit is likely to be as large as the Fiscal Monitor suggests. End-of-year accounting adjustments, particularly for PIT revenues, almost always push the final numbers in the government’s favour. Still, we expect the budget deficit will be larger than the federal government projected in the FES 2023, probably closer to $50B in the 2023–24 fiscal year. We pointed to downside risks to the deficit forecast in both our preview External link. This link will open in a new window. and overview External link. This link will open in a new window. of the Fall Economic Statement.


In the unlikely event that the deficit projection based on the Fiscal Monitor comes to fruition, it would deteriorate to 2.2% of nominal GDP this year, from a forecast 1.4% in the FES 2023. By way of comparison, the Congressional Budget Office expects the US federal government to run a deficit of nearly 6% of GDP this year. Meanwhile, the Office for Budget Responsibility in the UK anticipates the central government there to run a deficit of around 5.5% of GDP.


But larger deficits do mean more debt, and so the debt-to-GDP ratio is likely to be less rosy than the forecast published back in the fall of last year. That said, the federal government isn’t headed toward some sort of debt spiral as some have suggested. Even if the 2023–24 fiscal year deficit were to come in at the $62.4B suggested by the Fiscal Monitor, the federal debt‑to‑GDP ratio would rise to somewhere around 43% from the prior forecast of 42.4% last fall. A move in the wrong direction to be sure, but still well below the historic (66.6%) and pandemic-era (47.5%) peaks. And when the Government of Canada’s debt level is juxtaposed with those of the US and UK, for example, it pales in comparison as a share of the economy (graph 3).

More important than discussing the size of the possible federal deficit in Canada this year should be a conversation about where that money is going. And where it’s going is to greater-than-expected operating expenses like personnel costs and minor transfer payments that just keep piling up. At the recent press conference that accompanied the January Monetary Policy Report, Bank of Canada Governor Tiff Macklem warned about the need for policymakers to resist the urge to spend more. Otherwise, government spending risks working at cross purposes with monetary policy, making the Bank’s job of returning inflation to 2% that much more difficult. Interest rates could be higher for longer as a result, and nobody wants that.

NOTE TO READERS: The letters k, M and B are used in texts, graphs and tables to refer to thousands, millions and billions respectively. IMPORTANT: This document is based on public information and may under no circumstances be used or construed as a commitment by Desjardins Group. While the information provided has been determined on the basis of data obtained from sources that are deemed to be reliable, Desjardins Group in no way warrants that the information is accurate or complete. The document is provided solely for information purposes and does not constitute an offer or solicitation for purchase or sale. Desjardins Group takes no responsibility for the consequences of any decision whatsoever made on the basis of the data contained herein and does not hereby undertake to provide any advice, notably in the area of investment services. Data on prices and margins is provided for information purposes and may be modified at any time based on such factors as market conditions. The past performances and projections expressed herein are no guarantee of future performance. Unless otherwise indicated, the opinions and forecasts contained herein are those of the document’s authors and do not represent the opinions of any other person or the official position of Desjardins Group.