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Morneau prepares fall update as PBO report shows improving federal finances

Parliamentary Budget Officer Jean-Denis Fréchette is shown in this 2013 file photo. A report from Fréchette said the federal debt is on track to be entirely eliminated in just over 40 years.

Dave Chan/The Globe and Mail

Finance Minister Bill Morneau is preparing a fall update that is expected to show the federal fiscal landscape is improving along with the strengthening economy.

Mr. Morneau met with private-sector economists Thursday in Toronto to hear their assessments and recommendations. While they did not release their numbers, the consensus forecasts for GDP growth have increased to about 3 per cent for 2017, up from the 1.9-per-cent average forecast that underpins Mr. Morneau's March budget figures.

"I can say that we're getting to the fall economic update very soon. We're trying to hone in on a date. It will be something that will be in the coming weeks, not months," he said. "Our intent in that is to give Canadians a sense of where we are economically, and make sure that we consider other issues that are important in the public sphere right now."

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Mr. Morneau received some positive news Thursday in the form of a report from Parliamentary Budget Officer Jean-Denis Fréchette that said the federal debt is on track to be entirely eliminated in just over 40 years.

The PBO report also takes a close look at the fiscal health of the provinces, warning that provincial finances are not sustainable as a whole. The report singles out Quebec and Nova Scotia for praise, but warns that Alberta's finances stand out as a point of concern.

When Finance Canada last released its own long-term projections in December, it had outlined a scenario of annual deficits until the 2050s. The department's long-term estimate showed the federal debt would still be around 20 per cent of GDP in the 2050s.

The PBO's 2017 Fiscal Sustainability Report shows a more positive future for federal finances. The numbers also represent an improvement over what the PBO estimated in its 2016 outlook.

The PBO said the main reason for the improved federal numbers is revised assumptions on interest rates.

The PBO rankings are based on a measurement of the fiscal gap, which is the amount a government would have to change course in order to keep its debt-to-GDP levels stable. If the fiscal gap is positive, that could allow for a mix of tax cuts and new spending. If the gap is negative, a government would have to cut spending or raise taxes in order to keep debt stable.

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Quebec has the largest positive fiscal gap, at 3 per cent of GDP, while Alberta has the largest negative fiscal gap, at 4.6 per cent. Those findings may seem at odds with the fact that Quebec's debt load is currently much larger than Alberta's, but PBO officials say Alberta's debt situation is on track to worsen quickly while Quebec is on pace to quickly improve its debt situation.

Assistant Parliamentary Budget Officer Mostafa Askari said the findings will likely prompt increased debate on the issue of federal transfers to the provinces in areas such as health care and equalization.

Alberta does not currently receive equalization, while Quebec received more than $10-billion last year from Ottawa under the program. Nova Scotia received $1.7-billion.

Equalization is meant to ensure that citizens receive similar levels of provincial government services at reasonably similar levels of taxation, regardless of where they live in Canada.

Bank of Montreal chief economist Douglas Porter, who participated in the closed-door consultation session with Mr. Morneau, said that much of the discussion revolved around how Canada's stronger-than-expected economy should affect the government's fiscal policy. Not only has faster-than-expected economic growth meant more tax revenues, but a healthy economy also reduces the need for the significant government spending increases over the past couple of years that have helped stimulate Canada's growth.

"Most thought that stimulus was no longer needed – that the government should be leaning the other way at this point," Mr. Porter said.

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"Our advice … was to use extra revenue coming from recent upside economic surprises to come in below earlier deficit targets, rather than ramp up spending plans in an economy that is now less in need of stimulus," said Avery Shenfeld, chief economist at Canadian Imperial Bank of Commerce.

But Mr. Porter said the economists disagreed on how quickly the government should target deficit reduction, with some considering it a higher priority than others. The government, for its part, hasn't laid out a specific target date for eliminating its deficit, which stood at $17.8-billion in the 2016-2017 budget year.

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