MNI: Canada Finmin Rev Down Budg Gap Fcasts On Stronger Growth

--FY2017-18 Budget Deficit Revised Down to C$19.9B From C$28.5B 

--Economic Impact of Higher Rates to Be Felt Gradually

By Yali N'Diaye

     OTTAWA (MNI) - Canada finance ministry presented an improved fiscal outlook

Tuesday, as most economists had anticipated, with the fiscal year 2017-2018

budget deficit now seen at C$19.9 billion, far below the C$28.5 billion gap

expected last March.

     The improved outlook results from a better economic performance, with the

average private sector economists real GDP forecasts used as a basis for budget

projections upgraded to 3.1% in 2017 from 2.0% assumed in the March projections.

     The buoyant economy also allowed a better-than-expected outcome for

FY2016-2017, as the fiscal year ended with a C$17.8 billion deficit as reported

by the finance ministry in September, less than the C$23.0 billion gap initially

anticipated.

     The budget balance has improved for the following years as well, to reach

C$13.9 billion in FY2021-2022, and C$12.5 billion in FY2022-2013, for which this

was the initial estimate.

     The annual reserve - to face unexpected additional spending - was reduced

to C$1.5 billion from C$3.0 billion for FY2017-2018, but was raised again to

C$3.0 billion for the rest of the projection horizon through 2023.

     "The Canadian economy is performing well," Finance Minister Bill Morneau

said in prepared remarks.

     That being said, the Fall Economic Statement continued to warn about

elevated household debt that could constrain their spending going forward,

including when it comes to housing purchases.

     While "solid economic conditions" should continue to support housing

demand, higher interest rates and tighter housing rules at the provincial and

federal levels "should temper" that demand, the report said.

     The finance ministry urged households to be "prudent and manage their debt

levels in the context of rising interest rates."

     In fact, "the federal government will continue to closely monitor the

housing market."

     Despite the stronger economic performance, forecasters did not revise up

long-term rates significantly, with the 10-year government bond seen on average

at 1.8% this year, unrevised from March, 2.5% in 2018 and 2.9% in 2019, both

revised up 0.2 percentage points. This is consistent with the overall unchanged

growth forecasts beyond 2017.

     Upward revisions were mostly felt in short-term rates, with the 3-month

treasury bill rate revised up to 0.8% from 0.6% for 2017, to 1.5% from 0.9% for

2018, and to 2.0% from 1.4% for 2019.

     Still, at a time the Bank of Canada is paying "close attention" to the

sensitivity of the economy to higher interest rates, the finance ministry

expects "the economic impact of higher rates to be felt gradually over time."

     Despite the better fiscal outlook, "the Government remains committed to

sound fiscal management," it added, "balancing the need to make smart

investments to support economic growth while preserving Canada's low-debt

advantage for current and future generations." However, it did not commit to

balance the budget.

     The better economic outlook also helped improve debt prospects, with the

federal debt-to-GDP ratio now seen at 30.5% at the end of FY2017-2018, more than

a full point lower than what was announced in the 2017 budget tabled in March

(31.6%). The ratio is expected to fall below 30% in 2020, reaching 28.5% by the

end of the projection horizon in 2023.

     Overall, few surprises were included in the budget in terms of new

measures, with the small business tax reduction to 9% in 2019 having already

been announced.

     In addition, the indexation of Canada Child Benefit that was supposed to

start in July 2020 will now start in July 2018 due to the "growing economy and

improved fiscal track."

     According to private sector forecasts, inflation as measured by the

Consumer Price Index will rise from 1.6% in 2017 to 1.9% in 2018, where it will

stay through 2021.

     The WTI crude oil price is seen between $50 in 2017, revised down from $54,

and $59 in 2021, revised down from $64 last March.

     Overall, risks to the September 2017 economic outlook "appear broadly

balanced," the finance ministry said in its Fall Economic Statement.

     On the downside, the finance ministry cited rising protectionism, and more

specifically uncertainties regarding U.S. economic policies. It also cited the

high corporate debt levels in China and the slow pace of its economic reforms.

     Stronger global and Canadian growth are risks to the upside, that could

eventually lead to better-than-expected investment, and ultimately productive

capacity over the long term.

--MNI Ottawa Bureau; +1 613 869-0916; email: yali.ndiaye@marketnews.com

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