PBO sees long-term debt as sustainable but flags slim odds of meeting deficit-to-GDP goal
Ottawa’s own budget watchdog says federal finances are “sustainable” — yet he puts the odds of the government respecting its key deficit target at just 7.5 percent.
According to CBC News, interim Parliamentary Budget Officer (PBO) Jason Jacques now concludes that under the PBO’s framework, the federal balance sheet is sustainable over the long term, even as it remains tight.
That’s a notable shift from his earlier comments last fall, when he described Canada’s spending as “unsustainable,” “stupefying” and “shocking,” as reported by Bloomberg.
The most important structural change for markets is Ottawa’s decision to drop debt-to-GDP as its primary fiscal anchor.
According to Bloomberg, Prime Minister Mark Carney’s first budget removed the pledge to keep Canada’s debt on a declining path relative to GDP, and instead allows the net debt ratio to rise and remain elevated over the next five years.
In its place, the government adopted a declining deficit-to-GDP ratio and a promise to balance the operating budget by 2028.
As per CBC News, Jacques’s latest report estimates there is only a 7.5 percent chance the deficit-to-GDP ratio will fall every year through 2029-30, leading the PBO to say it is “unlikely that the government’s declining deficit-to-GDP fiscal anchor will be respected.”
At the same time, the PBO projects Canada’s debt-to-GDP ratio will decline over the next 30 years, leaving Ottawa with a limited but sustainable fiscal position.
How Ottawa classifies spending is another key tension point.
CBC News reports that Finance Canada now separates capital from operational spending in its deficit reporting.
It defines capital “broadly” as any expense or tax measure that contributes to public or private capital formation, whether held on the federal balance sheet or that of a private entity, Indigenous community or another level of government.
The PBO argues this definition is too expansive.
The watchdog says that while the government identifies $311bn in capital spending between 2024-25 and 2029-30, its own analysis finds only $217.3bn should qualify as capital.
The office also says this approach goes beyond the limits set out in the System of National Accounts, the international standard for economic accounting.
Given that subjectivity, the PBO recommends Ottawa “establish an independent expert body” to determine what counts as capital investment.
BNN Bloomberg reports that Jacques’s updated fiscal outlook projects the federal deficit will rise to $68.5bn this year from an estimated $51.7bn last year.
The deficit-to-GDP ratio is expected to widen before gradually shrinking, while annual deficits remain close to $60bn over the forecast horizon.
CBC News says the budget repeats Carney’s pledge to balance day-to-day program and transfer spending within three years.
However, the PBO finds that, absent measures in the 2024 fall economic statement and 2025 budget, operating spending could have moved into surplus as early as 2026-27.
Those additional measures now keep the operating budget in deficit until 2028-29, a year longer than the budget itself forecasts.
BNN Bloomberg reports that the PBO outlook does not yet include higher defence spending to meet an updated NATO benchmark or the government’s announced public service cuts.
It does, however, incorporate about $115.1bn in net new spending over five years and excludes roughly $20bn in platform commitments, according to testimony from PBO officials.
According to Bloomberg, International Monetary Fund Managing Director Kristalina Georgieva has said Canada remains in a stronger fiscal position than many of its G7 peers and can use that space to invest in infrastructure and productivity.
Yet the IMF also recommended last week that Canada restore a debt-to-GDP anchor “to reinforce accountability and help ensure investment plans remain sustainable and credible,” and argued a clear debt anchor should remain central to the fiscal framework.
Bloomberg reports that Carney’s November budget prompted more than three-quarters of economists in a Bloomberg poll to upgrade their forecasts for Canadian GDP, investment and productivity after seeing the details.
Jacques, who describes himself as an “unrepentent neoliberal,” agrees that more capital formation would lift productivity and potential growth.
Still, he characterizes the fiscal situation as “serious” and “challenging” amid global uncertainty and tariff risks, and warns that an “ambiguous” fiscal architecture may not work in Canada’s favour with businesses and bond investors.
Kevin Page, Canada’s first PBO, gave the Liberal budget a B for fiscal responsibility and said the country’s “fiscal structure” is sustainable despite higher debt and less room to absorb a major shock.
CBC News also reports that the government appointed Jacques as interim PBO in September for six months and is now seeking a permanent officer with “tact and discretion.”
Jacques has applied for the job, while the Conservative Party has pushed to keep him in the role.
