PBO says deficit likely exceeded Liberals' $40B pledge, economy to rebound in 2025

The federal government likely failed to keep its deficit below the promised $40-billion cap in the last fiscal year, the parliamentary budget officer said on Thursday.

In its latest economic and fiscal outlook, the budget watchdog estimates the federal government posted a $46.8 billion deficit for the 2023-24 fiscal year.

The final tally for last year's deficit will be confirmed when the government publishes its annual public accounts report this fall.

"Based on our analysis, the government will not meet its fiscal commitment to keep the deficit below $40 billion in 2023-24," Yves Giroux said.

Finance Minister Chrystia Freeland pledged a year ago to keep the deficit capped at that level, and said in her spring budget it would stay in line with the promise.

The new fiscal guardrail was part of an effort to quell fears that high government spending would fuel price growth and work at odds with the Bank of Canada's inflation-taming efforts.

A spokeswoman for Freeland would not say whether the federal government still expects to meet its fiscal guardrail on Thursday.

"Our federal government is making historic investments in the priorities of Canadians — in housing, affordability, and economic growth — and we are doing this in (a) fiscally responsible way," Katherine Cuplinskas said in a statement.

Assuming no new measures are announced, the PBO forecasts the federal deficit to decrease slightly to $46.4 billion for the 2024-25 fiscal year.

Meanwhile, the PBO says economic growth will remain tepid this year but will rebound in 2025 as the Bank of Canada's interest rate cuts stimulate spending and business investment.

The report forecasts real gross domestic product will grow by 2.2 per cent in 2025, up from a projected 1.1 per cent for 2024.

The PBO's economic forecast assumes a sharp reduction in the temporary resident population, given the federal government's recent policy changes.

However, the budget watchdog assumes the federal government will fall short of its target of reducing the temporary resident population to five per cent of the population.

Statistics Canada estimates there were about three million non-permanent residents in the country as of July 1, which represented about 7.2 per cent of the population.

The PBO report also offers a projection for interest rates, forecasting the central bank will keep cutting until its policy rate reaches 2.75 per cent in the second quarter of 2025.

The Bank of Canada's next interest rate announcement is scheduled for Wednesday, as economists gear up for a potential supersized rate cut.

Earlier this week, Statistics Canada reported that the annual inflation rate fell to 1.6 per cent in September, which is below the Bank of Canada's two per cent target.

The softer-than-expected inflation figure spurred more speculation that the central bank will opt for a half-percentage point interest rate cut next week, in lieu of its usual quarter-percentage point cuts.

The central bank's key interest rate currently stands at 4.25 per cent.