The federal cupboard is bare as Finance Minister Bill Morneau prepares the Liberal government’s second budget and fends off provincial calls to boost transfers for health care, new long-term forecasts from Finance Canada officials suggest.

A federal report projects decades of deficits, and in response, Mr. Morneau is promising to act with prudence on health-care spending.

Finance Canada’s report is the federal government’s first update to its long-term fiscal projections since the fall of 2014. The decades of surpluses Ottawa projected just two years ago have shifted to decades of annual deficits that will run beyond 2050.

Slower growth due to the decline in commodity prices, along with demographic pressures and a government that champions the merits of deficit spending, have all contributed to a dramatic shift in Ottawa’s fiscal horizon.

Conference Board of Canada chief economist Craig Alexander said the report shows demographic issues will produce a prolonged period of slower economic growth, squeezing government budgets provincially and federally.

“That means making really tough choices,” he said. “So it’s no surprise that the provinces are looking to the federal government to transfer more money to help fund the health-care pressures, but the federal government has limited fiscal capacity as well.”

Mr. Alexander said short-term deficits are justified given the current sluggish growth in the economy and the fact that the Bank of Canada has little room to cut interest rates further.

However, Mr. Alexander added that he would like Ottawa to set a clear target for returning to balance in the medium term.

Annie Donolo, a spokesperson for Mr. Morneau, said on Thursday that the report shows federal finances are sustainable but that Ottawa must approach calls for new spending with caution.

“We need to make every dollar count,” she said in a statement. “Whether in transit, in clean technologies or in health care, we will continue to make the kinds of investments that make a positive difference in the lives of families, and we will do so prudently.”

Prime Minister Justin Trudeau and the provincial and territorial premiers are at odds over the size of the Canada Health Transfer. The CHT is a major federal expense worth $36-billion this year. Changes in its growth rate can have major implications for federal and provincial finances.

Provinces rejected a federal offer in December that would have shifted the growth in transfers away from a formula tied to the growth rate of nominal GDP – which combines real GDP and inflation – in favour of a fixed increase of 3.5 per cent a year. Ottawa also offered $11.5-billion over 10 years outside of the transfer for spending on home care and mental health.

Since then, New Brunswick, Nova Scotia and Newfoundland and Labrador have accepted a similar federal offer that provides additional money for home care and mental health while tying the CHT increase to nominal GDP growth or 3 per cent, whichever is higher. The deals state that should the other provinces negotiate better terms with Ottawa, they would also apply to the three provinces. The Finance Canada forecasts are based on an assumption that the CHT grows in line with nominal GDP.

The remaining seven provinces and three territories wrote to Mr. Morneau and federal Health Minister Jane Philpott this week to request a meeting between premiers and Mr. Trudeau to resolve the standoff.

Manitoba Health Minister Kelvin Goertzen said on Thursday the Liberals’ offer will threaten his province’s ability to deliver health-care services. But he said he is also worried about the deals with individual provinces. “I’m more concerned about what it does to the universal nature of health care in Canada.”

Finance Canada posted its report on long-term fiscal projections on the Friday before Christmas without a news release. For months, Mr. Morneau has repeatedly declined to provide a timeline for erasing the deficit.

The Liberal Party election platform promised annual deficits would be kept at “less than $10-billion in each of the next two fiscal years” and would be erased before the 2019 election. However, Mr. Morneau’s fall fiscal update said the deficit would reach $27.8-billion next year before declining to $14.6-billion in 2021-22.

Finance Canada’s December report shows the deficit climbing again in the 2020s and 2030s to a high of $38.8-billion in 2035-36 before returning to surplus in the mid-2050s.

When measured as a share of the economy, the deficits are relatively small at 1.1 per cent or less over the projection period. The report estimates the federal debt would decline slightly over time as a share of GDP.

In contrast, the 2014 forecast projected large surpluses every year, growing to $220.4-billion in 2050. As a share of GDP, the 2014 forecast had the size of the surplus growing from about 0.5 per cent in the 2020s to 2.9 per cent by 2050.

Conservative finance critic Gérard Deltell said the decades of deficits go far beyond the few short years of small deficits the Liberals promised during the election campaign.

“This is the gift that we give to our children and grandchildren,” he said. “In only one year, they have proved without a shadow of a doubt that they have no control of public spending.”

OTTAWA — The Globe and Mail
Published Thursday, Jan. 05, 2017 11:37AM EST
Last updated Thursday, Jan. 05, 2017 9:23PM EST