Canada: Federal Fall Economic Statement Preview - The Known Knowns, Known Unknowns and Unknown Unknowns of Federal Spending Plans

Channelling the late Donald Rumsfeld, former US Secretary of Defense, in this note we lay out the known knowns, known unknowns and unknown unknowns of the federal fiscal forecast in the run‑up to the Fall Economic Statement 2023 (FES 2023).

The known knowns—the things we know we know—are well known. For instance, the starting point for the federal fiscal forecast is much improved over the Budget 2023 estimate. The economy also outperformed expectations in early 2023. But this is likely to be short‑lived. Indeed, the budget balance so far during the current fiscal year has underperformed. Add to this wage agreements with public servants reached before the House rose for the summer, and the known knowns of the federal fiscal forecast suggest a larger deficit in every year of the forecast.

Then there are the known unknowns—measures about which we know we don’t know everything we need to know. These include measures from unplanned industrial subsidies and booked but unrealized revenues and savings, to the possibility of a national pharmacare plan and the fiscal impact of recent carbon tax relief. Together, these have helped to further erode the federal government’s fiscal room, but by how much we can’t be certain.

Add to this the likely unknown unknowns coming in the FES 2023—the measures we don’t know we don’t know—and federal fiscal room will be further chipped away at. That said, the federal government has sufficient fiscal room to keep the debt‑to‑GDP ratio from rising consistently over the outlook. But this shouldn’t be taken for granted as rising interest rates are helping to push the debt service ratio ever higher, although it remains well below the level reached in the 1990s. As such, while the federal government would be wise to outline fiscal anchors and stick to them, one shouldn’t exaggerate the current state of federal finances, which remain in better shape than in our G7 peers.