CANADA’S FEDERAL GOVERNMENT FACING SIGNIFICANT DEFICITS

We have received many requests in recent days to estimate the status quo budget balances of the federal government.  Our estimates are shown in the table below.  These estimates are based upon our September 25, 2008 Quarterly Economic Forecast with a few adjustments.  That forecast featured a 0.7 per cent growth rate for Canada’s real GDP in 2008, 1.2 per cent for 2009 and 2.7 per cent in 2010.  Even though that forecast was prepared only a few weeks ago, we feel it appropriate to downgrade the growth rate somewhat for the end of this year and the beginning of 2009 to account for the very weak recent data coming out of the United States.  While some of the latest Canadian indicators have been positive, such as September’s astonishing employment surge, it is only a matter of time, and not much time, before the worsening situation in the U.S. economy spills over to Canada.  This adjustment weakens federal government revenue growth in our estimates.  But the 50 basis point rate cut by the Bank of Canada since our forecast and our assumption that another 50 basis points will be shaved off at the next Bank meeting offsets somewhat the impact on the budget balance by lowering public debt charges. 

A few assumptions and features of the projection should be noted: