The federal government is expected to reveal a fall economic statement on Thursday that shows finances have improved, but economists say that the increase to revenue and shrinking deficit will be short-lived as the threat of a recession weighs on the economy.
Finance Minister Chrystia Freeland is set to unveil a fiscal update at 4 p.m. ET on Thursday that the government says will "provide information on the state of the Canadian economy within a challenging global environment."
Economists widely expect that the update will show finances have improved. Financial statements released last week showed that the federal deficit for the 2021-22 fiscal year was less than anticipated, thanks to Canada's strong economic recovery and the winding-down of pandemic support programs.
"High inflation, a tight labour market and a better starting point are expected to boost revenues and reduce the deficit significantly again this year," Desjardins senior director of Canadian Economics Randall Bartlett wrote in a research note.
"The improvement in the federal fiscal outlook comes even as public debt charges move materially higher. This has led us to forecast a much smaller deficit in the 2022-2023 fiscal year than the federal government anticipated back in Budget 2022."
Desjardins predicts that the federal deficit for the 2022-2023 fiscal year will be much smaller than what was initially forecast last year, shrinking from a previously anticipated deficit outlined in last year's budget of $52.8 billion to $20.8 billion. Scotiabank Economics economist Rebekah Young wrote in a research note that the deficit could land in at around $32 billion for the fiscal year ending in 2023, which would represent 2 per cent of Canada's GDP.
Still, the outlook will dampen going forward.
"The bottom line should look substantially better in the near term owing to incredibly strong revenue performance in recent quarters, but a slowing economy is likely to put upward pressure on the balance sheet over the medium term," Young wrote.
"We expect more pressure on the bottom line in (fiscal year 2024) as the effects of a cooling economy catch up. A combination of weaker revenues and higher automatic stabilizers is likely to add to the deficit."
Many economists are predicting that Canada will enter a recession as early as the first half of 2023 as growth slows and rapid rate hikes made in response to skyrocketing inflation weigh on household budgets and the real estate market.
Bartlett says that the slowdown in real GDP growth in 2023 will be weaker than what is being forecast by the federal government, and will also lead to a higher unemployment rate which will slow down revenue growth while pushing up spending for programs such as employment insurance.
Desjardins is forecasting a return to larger deficits starting next year, "primarily because of our outlook for a recession in Canada."
"And while inflation is providing a tailwind to revenues now, what inflation giveth it ultimately taketh away," Bartlett wrote, pointing to inflation-indexed transfer programs for low-income seniors, households with children and provincial healthcare, as well as compensation for the public service, all of which are expected to increase.
As inflation and the impact of rising interest rates weigh on Canadian budgets, Ottawa has been facing some pressure to provide relief for struggling households. The federal government passed legislation aimed at providing inflation relief for low-income Canadians last month. The bill will temporarily double GST payments for six months for low-income earners. Prime Minister Justin Trudeau says payments will start going out this Friday.
To help you pay the bills, we’re doubling the GST Tax Credit for 6 months for 11 million households. Single Canadians without kids will get up to $234 more, couples with two kids will get up to $467 more, and seniors will get $225 more on average. Payments start going out Friday.
— Justin Trudeau (@JustinTrudeau) October 31, 2022
"The key to watch from Ottawa is whether, and to what extent, the federal government attempts to soften the blow for Canadians from 40-year high inflation," BMO chief economist Douglas Porter wrote in a research note. Freeland has so far warned not to expect big money to help Canadians cope with inflation, stressing in recent weeks that it would further fuel the issue.
"The Minister has often pointed out that Ottawa simply cannot lighten the load for everyone, and has clearly heard the message (loudly delivered from London) that fiscal policy should not act at cross purposes to monetary policy," Porter said.
"As such, we would expect a relatively quiet affair... without any large-scale new measures."
With files from The Canadian Press
Alicja Siekierska is a senior reporter at Yahoo Finance Canada. Follow her on Twitter @alicjawithaj.