09:26 AM EST, 12/11/2024 (MT Newswires) -- Canada's Finance Minister Chrystia Freeland announced at the start of the week that the government will release its 2024 Fall Economic Statement (FES) next Monday, noted Desjardins.

That's just a few days before the official start of winter and will be the latest a FES has ever been published outside of an election year, including during the pandemic, said the bank. At the same time, the federal government is likely to release its audited financial statements for the 2023-24 fiscal year -- the Public Accounts of Canada.

Desjardins suspects the Public Accounts will show the government's budget deficit came in larger last year than estimated in Budget 2024. The Parliamentary Budget Officer reached a similar conclusion earlier this fall.

While there seems to have been efforts made to find some change in the couch cushions to try to reduce the size of the deficit, the bank doesn't expect that it will be enough to wrestle the shortfall down to C$40 billion. That would mean the federal government has breached at least one of the fiscal anchors it established in the 2023 FES.

The new holiday spending measures won't make it easier to shrink the deficit this year either. As a result of this more downbeat starting point for the rest of the fiscal forecast, even the bank's improved economic outlook for this year and 2025 relative to Budget 2024 likely won't be enough to prevent a deterioration in the deficit outlook relative to the latest official projection.

As larger deficits lead to greater debt, Desjardins expects the federal debt-to-GDP ratio to be on a higher path over the coming years than forecast back in the spring. However, that's assuming the economy evolves in line with the bank's latest Economic and Financial Outlook.

That forecast included a 10% across-the-board tariff on all United States imports, although subject to uncertainty around the timing and extent of the application of customs duties -- although the bank assumes the Canadian energy and auto sectors are exempted. If President Donald Trump applies a targeted 25% tariff on all imports from Canada, the economic shock would likely be materially more adverse.

Add to that the anticipated drag on federal coffers from slower population growth, the promise to meet the 2% of GDP NATO defense spending target by 2032 and increased outlays on the border, and you have a recipe for the ongoing rise in the debt-to-GDP ratio in a downside scenario. That wouldn't leave a lot of wiggle room to roll out new fiscal stimulus measures to shore up a struggling economy.

The FES tends to handle budget overshoots through bill issuance just given this is an easier program to adjust. There is scope for further issuance in bills with the bill share of outstanding debt remaining below historical ranges. If there were to be adjustments to the bond program, it would likely be on the front-end, added Desjardins.

Even in the bank's downside scenario, Canada's federal finances still look like the cleanest dirty shirt in the fiscal laundry basket when compared with global peers, but that's nothing to celebrate. The fiscal challenges are set to worsen as Trump's policy agenda seems likely to pressure Canada in one way or another and the aging demographic continues to work to pressure domestic finances.