Canada Forecasts Bottom-Line Boost on Growth Surge

Canada's Liberal government said Tuesday that public finances have improved substantially due to strong economic growth, giving lawmakers leeway to sharply reduce deficits while delivering additional tax breaks to households with children and low-income workers.

Finance Minister Bill Morneau unveiled the revised forecast in the country's parliament. The positive budget news could help distract from the scathing criticism Mr. Morneau has received over the past few months over his efforts to change tax rules affecting small firms and the self-employed.

The Finance Department's fall fiscal update indicated the government's bottom line will improve by nearly 30 billion Canadian dollars ($23.72 billion) over the next three fiscal years, ending March 30, 2020, on stronger-than-anticipated growth. Of that windfall, Mr. Morneau said the government intends to spend roughly a quarter, or more than C$7 billion, in that period on enhanced child benefits and a beefed-up tax break for low-income workers.

The Liberal government faces re-election in the fall of 2019, and its popularity has taken a hit midway through its mandate due to proposed tax changes that roiled owners of small- to medium-size firms.

In an address to lawmakers, Mr. Morneau said the government's economic plan since coming to office -- of cutting taxes for middle-class households and boosting outlays on infrastructure -- has worked in producing the fastest growth among the Group of Seven economies, of 3.7% in the 12-month period to the end of the second quarter.

"Our strong fiscal position allows us to do what other countries would like to do, but can't afford to -- invest in ourselves," Mr. Morneau said. "Now, with a little more wind in our sails, we're doubling down on a plan with proven results and reinvesting in the middle class."

He added the government is on a "fiscally responsible" path, noting the ratio of debt to gross domestic product is forecast to fall from its current 31% level to below 30% in 2020.

In the 2017 budget plan presented in March, Canada anticipated 1.9% growth. Growth has been upgraded to 3.1% this year, and 2.1% in 2018 from an original 2% estimate. Nominal gross domestic product, or the broadest measure of taxable income produced in an economy, also was revised higher.

The deficit for the current fiscal year is now forecast at C$19.9 billion, or 0.9% of Canada's gross domestic product, compared with the previous estimate of a C$28.5 billion shortfall. Deficits for 2018-19 and 2019-20 fiscal years are also expected to narrow, to C$18.6 billion and C$17.3 billion, respectively. The revised outlook incorporates a C$3 billion adjustment for risk.

Traders will be looking at another forecast on Wednesday, when the Bank of Canada releases its latest interest-rate decision and updated quarterly outlook. Bank of Canada governor Stephen Poloz is widely expected to pause after rate rises in July and September and strike a more cautious tone on the forecast, highlighting the risk posed by a slowdown in housing and the Trump administration's trade policy.

Prime Minister Justin Trudeau came to power on a promise to bolster the middle class and ensure the wealthiest Canadians pay their fair share of tax. That narrative faced a heated backlash after Mr. Morneau introduced measures meant to crack down on tax advantages gained by roughly two million small firms and self-employed individuals from incorporating into a business. Doctors, farmers, and small-business owners argued the measures would hurt the very middle class the Liberals purport to help.

Mr. Morneau has retreated somewhat from initial plans and offered a tax cut to small firms on their first C$500,000 of income to help allay concerns.

Mr. Morneau has faced additional scrutiny over his personal wealth, including the shares he owns in Morneau Shepell Inc., the human-resources firm he ran before entering politics in 2015. Last week, he said he would sell his roughly one million shares in the company (worth nearly C$21 million based on trading on Tuesday in Toronto), and pledged to place his assets in a blind trust to avoid any conflicts of interest.

Nik Nanos, head of Ottawa polling firm Nanos Research, said Mr. Morneau's troubles have cast an unwanted cloud over the Liberals. He added his research suggests despite improving growth numbers, households are worried over recent rate rises given their debt levels, and the outlook for housing prices.

"The psychology of the economy does not favor the Liberals," he said.

Write to Paul Vieira at paul.vieira@wsj.com

(END) Dow Jones Newswires

October 24, 2017 17:20 ET (21:20 GMT)