Canada’s immigration clampdown could raise deficit, debt

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The Federal government’s move to rein in the entry of temporary residents to Canada could have more of an impact than we thought.

Ottawa wants to reduce the number of non-permanent residents to 5 per cent of the total population over the next three years.

Immigration has fuelled explosive population growth in Canada since the pandemic, raising concerns about whether the infrastructure, particularly housing, could handle it.

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However, there’s also a negative flip-side to slowing the numbers.

If Ottawa is successful, it will have an impact not only on economic growth, but also on the country’s deficit and debt, says Randall Bartlett, senior director of Canadian economics at Fédération des caisses Desjardins du Québec.

The plan to limit non-permanent residents will slow growth in the working-age population, which in turn will slow growth in real gross domestic product.

“A slower pace of real GDP growth and inflation means that growth in nominal GDP — the broadest measure of the tax base — will be lower as well,” said Bartlett.

Yet the Federal Budget 2024 assumes high population growth in the next few years and doesn’t explicitly incorporate the planned reduction in non-permanent residents, suggesting risks to its real GDP forecast, he said.

Fewer non-permanent residents means lower revenues which could lead to larger deficits and higher debt.

“Indeed, the federal debt-to-GDP ratio could end the next five years at a higher level than in Budget 2024’s downside scenario,” said the economist.

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When Desjardins applies the lower population growth forecast recently provided by Statistics Canada, the deficit swells nearly $8 billion a year higher than the Budget’s baseline.

“Of course, offsetting savings could be found by reducing spending. But this could be easier said than done,” said Bartlett.

The government recently pledged to increase defence spending to the NATO target of 2 per cent of GDP by 2032. Even if the rise is gradual, the new spending would add about 0.2 per cent of GDP to the deficit every fiscal year after 2025-26, he said.

Lower revenues and additional spending not included in Budget 2024, put the federal government’s fiscal anchors “very much at risk.”

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The Canadian economy actually beat expectations in May, data out yesterday showed. Gross domestic product (GDP), rose by 0.2 per cent in May after a 0.3 per cent increase in April, according to Statistics Canada, putting the second quarter on track for annualized growth of 2.2 per cent.

Douglas Porter, chief economist of BMO Capital Markets, who brings us today’s chart, says this most recent downturn has been similar to the “near-recession-misses in the early 2000s (tech wreck) and 2015-16 (oil price collapse).”

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“In all three cases, goods industries weakened, but didn’t plunge, and the services sectors managed to keep growing, just helping to avoid a full-on recession,” he said.

• Today’s Data: United States non-farm productivity, construction spending and ISM manufacturing
  
• Earnings: BCE Inc., Thomson Reuters, TC Energy Corp., Brookfield Infrastructure Partners, Glidan Activewear Inc, Amazon.com, Apple Inc.

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It’s still another five weeks or so until classes resume, but veteran investor Peter Hodson is taking us back to school — investing school, that is. He offers five rules we would do well to follow if we want to have success in the stock market in the long run.

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