Forecasts are being cut as Canada’s economy groans under the weight of higher-for-longer interest rates.

With third-quarter GDP expected to miss what the Bank of Canada and others were predicting just months ago, the bleaker outlook threatens to hit not only Canadians in their pocketbook — but their government as well.

“This souring of the economic outlook doesn’t bode well for the Government of Canada,” says Randall Bartlett, Desjardins’ senior director of Canadian economics, in a recent note.

Bartlett said two things stood out in July’s Fiscal Monitor, the monthly accounting of federal finances. Revenues were coming in at half the pace expected in the government’s 2023 Budget, as corporate income and sales taxes fell, and program expenses were growing at double the pace because of higher operating expenses and other transfer payments.

At the same time public debt charges are rising.

“Taken together, federal finances are tracking a worse annual outcome than at this time last year,” said Bartlett.

Then there are the extra expenses that have happened since the July accounting, such as a wage increase for the federal public service and higher subsidies for electric vehicle and battery plants in Ontario.

And federal finances could get even worse, says Bartlett.

If the government doesn’t generate the revenue or savings from measures outlined in its Budget, deficits could be larger by an average of about $5 billion annually, he said. “This would put the debt-to-GDP ratio on a higher, albeit still eventually falling, track.”

Dejardins’ analysis figures the government still has a cushion of about $13 billion a year while keeping the debt-to-GDP ratio from rising, but that doesn’t account for other recently announced measures.

Forgoing GST on purpose-built rental housing, delaying the deadline for repayment of the Canada Emergency Business Account loans and other unplanned industrial subsidies have already spent some of that fiscal room.

Spending more than that risks putting federal debt on “an unsustainable path,” said Bartlett.

The solution, he says, is restraint, even to the extent of cutting staff in the public service if savings cannot be found elsewhere.

“It’s unfortunate, but it may be the only way to ensure that long-term fiscal sustainability is maintained and the risk of further debt downgrades is reduced,” he said.

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The pandemic was rough on office towers and today’s chart shows just how rough for major markets in the United States. Office buildings have never fully recovered from the COVID-19 lockdowns that sent employees home to work remotely, a practice that continues today. As vacancy rates rise in most markets, rents fall and capital values decline.

But “the problems facing most cities pale in comparison to San Francisco,” said Capital Economics.

Capital sees values of office buildings in this city weakened by a shrinking tech sector dropping more than 50 per cent from the peak at the end of 2019 to the trough from 2024 to 2026.

Office visits here are still more than 50 per cent below pre-COVID levels. Occupied space is expected to fall 10 per cent and with it the prices landlords can ask, making San Francisco the worst performer for rents.

Get all today’s top breaking stories as they happen with the Financial Post’s live news blog, highlighting the business headlines you need to know at a glance.

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Canada should accept the recommendation of the Royal Commission from almost 60 years ago and adopt the family as the basic taxing unit instead of the individual, argues Kim Moody. He explains why that would result in a much fairer system and eliminate a lot of the complexity in the Income Tax Act. Find out more

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Today’s Posthaste was written by Pamela Heaven, @pamheaven, with additional reporting from The Canadian Press, Thomson Reuters and Bloomberg.

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