MNI 5 THINGS To look For: Stronger Growth, Smaller Deficits

--Lower Refinancing Needs

By Yali N'Diaye

     OTTAWA (MNI) - The Canadian government will present the 2018 budget Tuesday

against the background of a robust economic growth, with gender equality

expected to be a central theme.

     Following are five things to look for in the Canadian Budget to be released

around 4:00 pm ET:

     - The 2018 Budget will benefit from a solid economic background, along with

healthy corporate profits, which could translate into smaller deficits than

projected in the Fall Economic and Fiscal Update. Based on a "better starting

position and assuming no major spending/revenue measures, we'd be looking for

something in that C$12-17.5 billion range for FY2018-19 and a slightly lower

range of C$10.5-16 billion for FY2019-20," RBC analyst Josh Nye told MNI. The

Fall update had the deficit at C$18.6 billion for FY2018-19 and C$17.3 billion

for FY2019-20.

     - Stronger economic growth also means stronger pressure to balance the

budget. However, there are little expectations among economists on that front,

and certainly not for 2019, as Liberals had promised during their electoral

campaign. Any indication on the government's intentions on that front would be

noticeable.

     - Another factor to monitor will be the adjustment for risk, which was

C$3.0 billion for each fiscal year from 2018-2019 through 2022-2023 in the Fall

update. Given ongoing uncertainty related to NAFTA, IHS Markit economist Arlene

Kish told MNI, "the government is likely remain cautious on growth assumptions

and build in a healthy risk adjustment cushion."

     - Whether and how the Canadian government will respond to the U.S. tax cuts

to maintain Canada's competitiveness will also be on the radar, although Finance

Minister Bill Morneau has already indicated that Canada won't have an

"impulsive" reaction. So extra spending to address the competitiveness issue is

unlikely.

     - In terms of debt management, smaller deficits could translate into a

better debt  profile, and declining financing requirements. The Fall economic

statement assumed the 10-year government bond yield at 2.5% for 2018 and 2.9%

for 2019. Given that it was already trading around 2.20% Monday, there is an

upside risk. RBC sees Canada government bond issuance falling to about C$120

billion for the upcoming fiscal year from C$136-C$137 billion at the end of the

current fiscal year.

--MNI Ottawa Bureau; +1 613 869-0916; email: yali.ndiaye@marketnews.com

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