Government budgets, just like family and business budgets, are only as accurate as the assumptions underlying the figures.
The federal government’s 300-page budget released earlier this month lists a page of data with assumptions on what direction the economy will take.
Whether Finance Minister Chrystia Freeland’s budget deficit reduction comes true depends largely on these assumptions.
For the most part the predictions see modest growth, modest inflation, mildly increasing interest rates and stable dollar value versus the American dollar.
Gross Domestic Product Growth (GDP), our national income, is supposed to hit a strong 3.9 per cent this year after inflation — averaging just over two per cent a year for the next four years.
A recession caused by war, inflation or sudden jumps in interest rates could cut into this growth.
Two interest rates that influence financial decisions are expected to increase mildly.
The three-month government treasury bill rate, now .8 per cent is expected to double to 1.7 per cent in 2023 peaking at 2.2 per cent and ending at 1.5 per cent in 2026. Good news for seniors relying on interest income, not so great for financing business.
The 10-year government bond rate, currently two per cent, will get as high as three per cent in 2026. Again good news for savers, not for business. These rates are used in planning as a benchmark alternative to projects in planning.
Higher bond rates will remove some money from stock markets, reducing stock prices levels and will turn marginal business investments unviable.
The budget sees the exchange rate between the Canadian and U.S. dollar staying stable, averaging 79.9 cents Canadian this year with a slight increase as high as 80.l4 cents in the years 2023 to 2026.
Increased income tax revenues are based on economic growth and employment levels, with the unemployment rate averaging 5.8 per cent this year and 5.5 per cent for the next four years. That sounds like ongoing labour shortages and inflationary wage increases are coming.
Consumer price inflation, expected at 3.9 per cent this year ranging between 2.4 and two per cent for the following four years assumes labour peace, slackening of supply chain shortages and commodity prices increases. Given the global situation low inflation could be way out in left field.
Higher inflation inflates government revenues.
Oil price forecasts for the five years seem low, although the forecast prices are less than those of international accounting firm Deloitte by one or two dollars a barrel.
According to Deloitte, WTI oil has averaged $90.64US for the first three months of the year. The federal budget foresees an $80 average in 2022.
The feds see $74 next year, falling $2 a barrel each year after that to 2026. It seems the budget underestimates the decline in oil demand for the next five years.
If the feds are wrong oil royalty revenues will swell from higher prices.
Predicting inflation, interest rates, exchange rates, economic growth and commodity prices five years ahead is a mug’s game in this uncertain world. Let’s hope the estimates are on track.
Ron Walter can be reached at ronjoy@sasktel.net
The views and opinions expressed in this article are those of the author, and do not necessarily reflect the position of this publication.
