Federal Fiscal Update Preview: Federal Deficits are Smaller Than Expected but Don’t Get Used to It

The federal deficit was much smaller last year than expected in Budget 2022. High inflation, a tight labour market and a better starting point are expected to boost revenues and reduce the deficit significantly again this year. However, we are forecasting a return to larger deficits starting next year, primarily because of our outlook for a recession in Canada in 2023. Government of Canada borrowing costs are also set to rise sharply but to remain low by historical standards. Despite still elevated deficits, the federal debt-to-GDP ratio is likely to fall much more quickly than expected in Budget 2022. But the risks to the federal fiscal outlook are tilted toward larger, not smaller, deficits.