February 22, 2016 / 3:43 PM / in 2 years

Canada government warns of big budget deficits, growth forecast cut

Canada's Finance Minister Bill Morneau speaks during Question Period in the House of Commons on Parliament Hill in Ottawa, Canada, February 3, 2016. REUTERS/Chris Wattie

OTTAWA (Reuters) - Canada’s Liberal government warned on Monday it would run much bigger budget deficits than previously anticipated, as lingering low commodity prices weaken the country’s growth outlook.

The announcement by Finance Minister Bill Morneau confirmed that the Liberals’ economic estimates during last year’s successful election campaign had been too rosy.

Growth in 2016 would be 1.4 percent, down from the 2.0 percent forecast used in the finance department’s last budget update in November, said Morneau, relying on an average of private sector economists’ forecasts.

He said the 2016-17 budget gap would be C$18.4 billion ($13.44 billion), with a 2017-18 deficit of C$15.5 billion.

Those forecasts exclude spending plans to be unveiled in the March 22 budget, so the overall deficit will be several billion dollars higher than the figures released on Monday.

In November, the Liberals had forecast that excluding their spending plans, the budget deficit would be C$3.9 billion in 2016-17 and just C$2.4 billion in 2017-18.

BMO Capital Markets said in a note the Liberals now look set to run a deficit of around C$30 billion in 2016-17, assuming additional stimulus spending of roughly C$10 billion in the upcoming budget.

Morneau said despite the weak state of the economy, he would stick to plans to invest in infrastructure projects.

Conservative leader Rona Ambrose said the Liberals were trying to justify breaking a campaign promise by suggesting the widening deficit was not their fault.

Financial markets showed little reaction to the budget figures.

CIBC Economics said in a note the economic backdrop “isn’t pretty, but that’s not news to anyone who has followed the deterioration in private sector forecasts”.

The government on Monday forecast West Texas Intermediate crude prices would average $40 a barrel in 2016. The price was just above $31 on Monday. [O/R]

Slumping oil prices have caused Canadian energy companies to slash investment and workers. The jobless rate in the energy-producing province of Alberta in January rose to 7.4 percent, its highest since 1996.

The Liberals pledged during the campaign to run three consecutive budget deficits of no more than C$10 billion a year to help fund spending on infrastructure before balancing the books in 2019/20.

“Our starting point is much further back than we thought,” said Morneau.

Last week, Morneau acknowledged the deficit would not be eliminated on time. He now stresses the importance of ensuring the federal debt-to-GDP ratio keeps declining.

($1 = 1.3687 Canadian dollars)

Editing by Jeffrey Hodgson and Andrea Ricci

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