The new Liberal government has gone over the books and says it is likely inheriting lots of red ink.

The last Conservative budget forecasted a $2.3-billion surplus for this year, but Finance Canada now says it's more likely the year will end with a $3-billion deficit — and that's before Liberal campaign promises are costed in.

As the oil shock rolled through the country, business investment plummeted, shrinking the economy in the first half and dampening growth in the second half.

'The simple truth is that the economy has not performed as well as projected in the last budget.' - Bill Morneau, Canada's finance minister

Finance Canada still predicts the economy will eke out growth in 2015 — but only at an average of 1.2 per cent. The April budget by the Conservatives had predicted two per cent growth for the year.

"The simple truth is that the economy has not performed as well as projected in the last budget," Finance Minister Bill Morneau told a news conference Friday morning in Ottawa. "Despite the economic situation we've inherited … we have a plan to deal with it."  

$3B deficit and counting6:45

The deteriorating economic picture means that the projections of last April are now about $6 billion per year lower, on average, for the next few years. That accounts for the projected $3-billion deficit in the current fiscal year and a larger $3.9-billion deficit next year, before eventually returning to surplus in 2019-2020.

Part of that is the ongoing slump in oil prices. In April, the government was assuming a per-barrel price of $63 US and up for WTI next year. That's been ratcheted down to $50 US a barrel. Even that lowered figure is $10 above where oil is currently trading, just over $40 a barrel.


Ottawa is also now assuming a weaker loonie, too. In April, the budget was forecasting an 83-cent loonie, on average, between now and 2019. Friday's fiscal update downgrades that to 79 cents US.

The loonie is currently trading hands at around 75 cents US.

Morneau noted that Canada is not the only country with an economic picture that isn't looking as rosy as it did earlier in the year. The International Monetary Fund is now projecting the global economy to grow by just 3.1 per cent this year — the smallest forecast since 2009, when most developed economies were in recession.

The Liberals had originally planned to post "modest" deficits of $10 billion or under for the first few years of their mandate, but those were based on a budget that was supposed to be currently in surplus.

'It's just not possible to cut our way to prosperity.' - Morneau

If the government's budget is already in the red, those deficits could be much larger than anticipated, but the finance minister deflected numerous attempts by journalists to get him to acknowledge that reality.

"It's just not possible to cut our way to prosperity," said Morneau.

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Ottawa's books are a lot worse than previously thought, new Finance Minister Bill Morneau said Friday. (Sean Kilpatrick/Canadian Press)

The Official Opposition Conservatives were quick to respond to the numbers, asking the government why their updated figures don't mesh with the recently released Parliamentary Budget Officer (PBO) report, which is forecasting a small $1.2-billion figure for the current fiscal year.

"Clearly some of the money has already been spent or the plans have been put in place behind closed doors, and we'd like to know what that money difference [is] between what the PBO said and what is being said today," Tory finance critic Lisa Raitt said.

The NDP, for its part, said it will hold the government to account to ensure it is financially sustainable while also investing in the economy in the way it said it would during the federal election campaign.

"We are giving this government some time to come clean on what it wants to do," NDP finance critic Guy Caron said. "We have to ensure the government remains fiscally responsible, [but] the idea of balanced budgets at all costs has never been part of our platform."

'Manageable' deficits

At least one major bank said Friday that the new numbers suggest bigger deficits are indeed now in the offing, but Toronto-Dominion Bank said they should be "manageable."

"Assuming that budget deficits of $10 billion [as promised in the Liberal platform] will be completely additional to today's starting point, near-term deficits of between $13 billion and $14 billion can be expected when budget 2016 is announced," the bank said. "At approximately 0.7 per cent of GDP, these deficits appear manageable."

For comparison purposes, the U.S. government had a deficit-to-GDP ratio of roughly 2.8 per cent last year.

Canada's Liberal government was quick to stress that the calculations in Friday's update did not factor in any of the costs of some of the promises the Liberals made on the campaign trail, including big infrastructure spending and a rejigging of the tax code to lessen the burden on middle-income earners at the expense of higher ones.

Stock options issue

Morneau did, however, offer one tidbit about a campaign promise and that was on the subject of stock options.

Conservative Finance Critic Lisa Raitt challenges the Fiscal Update1:35

The government says it's looking into the way they are taxed, but assured that any changes it makes would not be retroactively implemented — meaning any changes would only be in effect for future tax years, not the current one.

The government is still trying to decide what to do about stock options, but even if it one day changes the rules, "any options in effect will be subject to the taxation framework prior to that date," Morneau said.