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Photographer: Cole Burston/Bloomberg Photographer: Cole Burston/Bloomberg

Prime Minister Justin Trudeau’s government released new budget estimates that showed federal finances in much worse shape than expected, even before the Liberals move ahead with tens of billions of dollars in new campaign pledges.

The government is currently on track to run a deficit of C$26.6 billion ($20.2 billion) this year and C$28.1 billion in 2020, according to a fiscal update released Monday in Ottawa by Finance Minister Bill Morneau. That’s above the C$19.8 billion and C$19.7 billion deficits projected in the government’s last budget. Deficits in the five years between 2019 and 2023 will exceed projections by about C$35 billion.

Justin Trudeau

While the revisions mostly reflect actuarial revaluations of federal employee pensions, it’s a much weaker starting point for the Liberals, who won a second -- albeit watered down -- mandate in October’s election. The Liberals pledged new annual measures expected to cost about C$15 billion annually over the next four years, though planned tax increases will buffer some of the impact on deficits.

It will be a difficult balancing act for Trudeau. Not only must he finance his own ambitious campaign pledges, he may also need to accommodate new demands from provinces and opposition parties. At the same time, he’s trying to reassure Canadians, and credit rating agencies, the government remains fiscally prudent by keeping debt as a share of the economy on a declining path.

“The prime minister gave me a mandate where he asked me to ensure that we meet a couple of key conditions,” Morneau told reporters outside the legislature. “One is that we do maintain that very strong balance sheet by reducing our debt as a function of our economy, and we’re doing that. Second is we want to continue to invest in Canadians.”

Taxes and Pensions

One consolation is that the federal government’s deficit levels are low compared with its peers. If Monday’s revenue projections turn out to be correct, Canada’s deficits next year may surpass the C$30 billion threshold for the first time since 2010, but that will still be just 1.3% of GDP.

The updated deficit numbers include the personal income tax break that Morneau introduced last week and which will take effect Jan. 1. The measure would gradually raise the basic personal income tax deduction by about 20% over the next four years, costing C$3 billion in 2020, and about C$6 billion by 2023.

Actuarial adjustments to pensions and other benefits added C$4.9 billion in spending in 2019, and about C$28 billion over five years. Other additional expenses since the March budget included C$1.9 billion this year related to the renewal of a revenue sharing agreement tied to the Hibernia offshore oil project in Newfoundland.

Deficits are widening even as the federal government’s revenue comes in slightly stronger than expected in 2019 and 2020. Revenue in 2019 is seen at C$340.1 billion, up from the C$338.8 billion projected in March. In 2020, the federal government expects to take in C$352.3 billion, versus initial projections of C$351.4. Program expenses are well above projections however.

Read more: Scheer Quits as Tory Leader After Failing to Defeat Trudeau

At a press conference, Morneau reiterated his government’s pledge to keep the nation’s debt-to-output ratio on a declining path, though that’s becoming an increasingly tough target to meet. The ratio, projected at 31% in 2019 and 2020 in the current outlook, will only increase, given Trudeau’s spending plans. However, the finance minister said keeping the ratio on a downward path and preserving the nation’s AAA credit rating are the government’s two “budget anchors.”

The new deficit numbers already surpass the peak budget gap projected by the Liberals during the election campaign. They had anticipated the shortfall would jump to about C$27 billion in 2020 once new tax cuts and spending were introduced.

— With assistance by Erik Hertzberg, and Shelly Hagan

( Updates with details throughout. )