MNI POLICY: Canada Needs Debt-GDP Target After Pandemic-OECD

Canada needs to restore a specific fiscal target such as debt-to-GDP after the burst of deficits to fight the pandemic is no longer needed or risk a loss of investor confidence, the OECD said, joining a growing chorus of calls for clarity on rebalancing the government's books.

For now the focus must remain on the substantial rescue package, because a strong economic restart will help slim the deficit as emergency spending ends and tax revenue ramps up, the Paris-group said in a review of the country's economy.

"A policy roadmap for managing the debt is needed to head off risks to fiscal sustainability and to reassure markets," the OECD report said. "Given the potential challenges for debt reduction, the federal government should consider a numerical debt-to-GDP target."

Prime Minister Justin Trudeau has said the government will do whatever it takes to support households through the pandemic, and has abandoned "fiscal anchors" in favor of a plan for another CAD70 billion to CAD100 billion of deficit spending after the pandemic. Business groups have told MNI some of that spending will come too late to be effective and threatens Canada's fiscal credibility, and the IMF has also called for more clarity.

Canada's gross general government debt, a broader measure than the federal shortfall, jumped from 93% of GDP in 2019 to 122% last year and and will increase to 128% this year, the OECD projects. The baseline outlook shows the debt-to-GDP ratio doesn't return to pre-pandemic levels for about 15 years.

That's even as economic growth swings from a 5.4% plunge last year to a 4.7% increase in 2021, paving the way for the general government deficit to shrink from 10.7% of GDP last year year to 1.8% in 2022.

"Fiscal policy should continue to prioritize bolstering economic recovery but also prepare the groundwork for containing public debt when the recovery is well under way," the OECD said.

The economic rebound won't pose much trouble to the central bank's QE program in terms of creating massive inflation, the OECD said.

"As for other countries, the risk of expansion in the central bank's balance sheet expansion leading to excessive consumer-price inflation in the medium term is not seen as substantial, because demand in the economy is not expected to be strong enough to induce price rises."