Canada experienced a larger budget deficit in August compared to the previous year, primarily due to decreased revenue and increased debt-financing costs. The impact of higher interest rates is evident in this reflection of the nation’s finances.
Budget Deficit Increase
According to Canada’s Department of Finance, the government recorded a budget deficit of 3.05 billion Canadian dollars (equivalent to $2.21 billion) in August. This marks an increase from the 2.45 billion Canadian dollar shortfall in the same month the previous year. Looking at the first five months of the current 2023-24 fiscal year, the budget deficit currently stands at 4.29 billion Canadian dollars, contrasting with a 3.88 billion Canadian dollar surplus during the same period of the preceding year.
Revenue Decline and Rising Costs
In August, tax revenue saw a decline of 4.6% compared to the previous year, reaching 27.92 billion Canadian dollars. Total revenue also experienced a decrease of 1.3% to 33.65 billion Canadian dollars after accounting for yearly increases in payroll and carbon levies, which rose by 10% and 37%, respectively. On the other hand, government program expenses and administrative costs rose by 0.6% to 32.53 billion Canadian dollars. Meanwhile, public-debt charges observed a significant increase of 20.6%, totaling 4.30 billion Canadian dollars. This surge is attributed to higher interest rates.
Impact on Bond Yields and Fiscal Projections
The yield on a Government of Canada five-year bond reached a peak of 4.09% in August, marking an increase of approximately one percentage point from the same month in the previous year.
In terms of fiscal projections, the recently released final figures for fiscal year 2022-23 depict a budget deficit of 35.3 billion Canadian dollars. This figure is significantly smaller compared to the previous fiscal year and narrower than what was anticipated in this year’s financial plan.
Finance Minister Chrystia Freeland is expected to provide an update on public finances in the coming weeks. However, the Canadian parliament’s budget watchdog has cautioned that the deficit for the current fiscal year is likely to reach 46.5 billion Canadian dollars. This amount is equivalent to 1.6% of the country’s economic output and is a result of slower revenue growth and increased expenses. The watchdog also predicts that the debt-service ratio, which measures public-debt charges against tax revenue, will peak at 12.0% this fiscal year.
Freeland’s 2023 budget plan initially projected a budget deficit of 40 billion Canadian dollars for the current fiscal year. Emphasizing the importance of fiscal responsibility, Freeland intends to deliver a “fiscally responsible” plan in the upcoming fall fiscal update.
