As it turns out the increase in the deficit this yea to $26 billion is not that mysterious. It is in fact largely the result of spending and tax policy changes this year and last year. Without these policy actions the deficit would have been about $11 billion this year, $3 billion lower than last year.

The Minister of Finance, in his December 2019 Economic and Fiscal Update, estimates that the deficit for 2019-20 will be $26.6 billion, $12.6 billion higher than the final outcome for 2018-19. This is one of the largest year-over-year increases in a non-recession period since the War 11. It also happens when nominal GDP growth in 2019 is forecast to grow only slightly slower than in 2018, (by 0.3 percentage points).  The Liberal government has been broadly criticized for not having control over spending and any plan to eliminate the deficit.

So why was there such a large increase in the year over year deficit? The answer is that new policy initiatives and a number of other non-economic factors contribute to the increase in the deficit.

In 2018-19, revenues increased by $20.9 billion from 2017-18. In contrast, this year revenues are expected to increase by only $8.0 billion. This is a substantial reduction in revenue growth, especially when nominal GDP growth in 2019 is expected to be only slightly lower than in 2018.

The revenue increase in 2019-120 would have been larger except for the impact of policy initiatives coming into effect this year. This includes the November 2018 Update measure to encourage business investment and the December 2019 Update measure increasing the Basic Personal Amount. These measures are estimated to reduce revenues by $5.1 billion in 2019-20, relative to 2018-19. In addition, the 2019-20 results are also negatively affected by the ending of retaliatory tariffs on steel, aluminum and other products, estimated at about $1 billion.Partially dampening the impact of these measures is the introduction of the carbon tax, which increased revenues in 2019-20 by $2.6 billion.

If these policy initiatives were excluded, the underlying increase in budgetary revenues in 2019-20 would be $11.5 billion. This is still considerably lower than the increase of $20.9 billion witnessed in 2018-19, despite the fact that nominal GDP growth in 2019 is only slightly lower than in 2018.

In the December 2019l Update, program expenses are expected to increase by $17.9 billion in 2019-20, compared to an increase of $14.6 billion in 2018-19. The increase in 2019-20 incorporates the fiscal impact of the refund of the carbon tax, which is expected to increase program expenses by an incremental $2.3 billion in 2019-20.  However, as noted above, this expense is a refund of the carbon tax assessed and as such has no major impact on the budgetary balance. Excluding the impact of this refund, the increases in program expenses in 2018-19 and 2019-20 are nearly identical. 

However, spending initiatives proposed in the December 2019 Update increased program expenses by $3.4 billion in 2019-20 (this includes $1.9 billion Hibernia Dividend Agreement payment and $1.5 billion in other policy initiatives).  The change in accounting for pensions and future benefits added another $2 billion.

In addition, it appears that direct program expenses were increased by an additional $3.4 billion in 2019-20, for which no explanation has been provided by the Finance Department.

These spending increases total $11.8 billion. If this new spending were excluded, then the increase in program expenses in 2019-20 would have been $6.1 billion instead of $17.9 billion.   

In the absence of the new spending and tax changes last year and this year, the deficit in 2019-20 would be about $11, $3 billion lower than the final outcome for 2018-19.

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