November 20, 2015 / 6:30 PM / 2 years ago

UPDATE 2-Canada's new gov't says fiscal outlook worse than projected

3 Min Read

(Adds Morneau quotes on government's fiscal intentions, Conservative and market reaction)

By Randall Palmer

OTTAWA, Nov 20 (Reuters) - Canada's new Liberal government said on Friday it was inheriting a significantly gloomier fiscal picture than previously expected, and did not rule out the possibility it would run higher budget deficits than it had campaigned on.

Finance Minister Bill Morneau unveiled an economic and fiscal update which projected billions of dollars of deficits based on the former Conservative government's plans, despite previous Conservative forecasts of surpluses.

A large portion of the worsened outlook is due to the Liberals, who defeated the Conservatives in last month's election, having lowered growth forecasts to levels well below downwardly revised levels predicted by private-sector economists.

The move effectively adds a buffer or contingency reserve for worse-than-expected growth.

The fiscal update does not include Liberal spending promises made during the election.

Reporters repeatedly pressed Morneau as to whether the Liberals would now run deficits exceeding the C$10 billion ($7.5 billion) limit they had set in the campaign.

"It would be too soon for me to answer your question," Morneau said.

He spoke of the need to strike "a balance between fiscal discipline and our promises to Canadians." He also said it was clear governments cannot cut their way to prosperity, and the disappointing outlook reinforced the need for the Liberal spending promises.

Conservative legislator Lisa Raitt urged the Liberals not to "let deficits balloon out of control."

It was still unclear what the government's plans were for the fiscal year that started in April. Their campaign documents had only dealt with 2016-17 and beyond.

Excluding the Liberal plans, the update forecast the deficit would be C$3.0 billion in the current fiscal year and C$3.9 billion in 2016-17, with deficits continuing through 2018-19.

The government's decision to cut the growth forecast added C$1.5 billion to the projected deficit for 2015-16 and C$3.0 billion for each of the five years from 2016-17 on.

The Conservatives' April budget had forecast a C$1.4 billion surplus in 2015-16 and C$1.7 billion in 2016-17.

The news spurred little market reaction. Bank of Montreal senior economist Robert Kavcic noted the current deficit projection was small as a share of gross domestic product and that net debt still should fall as a percentage of GDP.

Because the deficits are a small share of GDP "the market will adjust to that and not treat it as negatively as we once did years ago," said Rob Catani, managing director of fixed income at National Bank Financial.

($1=$1.33 Canadian)

Additional reporting by Alastair Sharp and Fergal Smith in Toronto; Editing by James Dalgleish

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