MNI: Canada Boosts Deficit Profile, Saves Mortgage Bonds

Canadian Finance Minister Chrystia Freeland modestly boosted deficits over the next five years though near-term program spending runs much faster than the central bank says lines up with price stability.

For the fiscal year ending next April the deficit remains little changed at CAD40 billion with program spending up 0.8%, according to a fall fiscal update Tuesday. The plan doesn’t fully tackle a housing and cost-of-living squeeze that’s put Justin Trudeau’s Liberals well behind Conservatives in recent polls.

The pace of program spending still ramps up to 5.6% next year, ahead of the 2% the BOC says is the economy’s potential growth rate. While deficits narrow over the next five years Freeland added several billion dollars of new measures in each period.

Freeland told Parliament said she’s juggling the pinch of higher inflation and global interest rates, a slowing Canadian economy and more spending that would make the Bank of Canada’s job harder.

“I absolutely understand that after three difficult years—with a global pandemic, global inflation, and global interest rate hikes Canadians are worn out, frustrated, and feeling the squeeze,” she said.

The projections are based on a consensus of private economists who see inflation above the Bank’s 2% target until the end of next year, a bit sooner than the central bank’s view that won’t happen until sometime in 2025.

The consensus forecast shows GDP growth of 0.4% in 2024 but no recession, though a mild one is possible in a downside scenario. Growth was seen picking up to 2.2% in 2025.

Economists see the Bank cutting interest rates in Q2 2024 from today’s 5% to 3.75% by the end of next year. Officials say while they can look at cuts before inflation is back to target it’s premature to look at easing without compelling evidence things are moving durably back to target.

The budget referred to a series of smaller and some previously announced housing measures such as taking federal sales tax off new rental co-op units and lacked a plan for the extra 3.5 million units the federal housing agency says are needed by 2030 to restore affordability. “This challenge is not something that the federal government can solve on its own,” the budget said. The federal housing agency said building the new houses would cost a trillion dollars and requires strong efforts in the private sector and across all levels of government.

Canada is also codifying earlier guidance to mortgage lenders on offering relief to borrowers running into difficulty amid the jump in interest rates. That includes extending amortization on loans and not requiring previously insured borrowers to requalify under an interest-rate stress test.

The government continued to fiddle with its last fiscal “anchor,” a commitment to lower debt as a percentage of GDP. With the deficit smaller than expected in the fiscal year that closed in April, the ratio climbs in the current fiscal year and again next year before declining again. Deficits remain small as a share of GDP, holding around 1% over the projection.

Freeland said the government will set keeping future deficits below 1% of GDP as a new type of anchor and making sure next year’s deficit equal to or lower than this year.

Public debt charges rise from CAD35 billion in the fiscal year that ended April 1 to CAD46.5 billion this year and CAD52.4 billion next year. Five years from now, interest costs of CAD60.7 billion will far outstrip the projected deficit of CAD18.4 billion.

The federal debt of CAD1.22 trillion this year will reach CAD1.32 trillion in 2026-27. Canada benefits from top credit ratings from Moody’s and S&P. Still, 10-year bond yields have climbed about a percentage point over the last six months to 3.75%.

The fiscal outlook looks hardy compared with the U.S. where the Congressional Budget Office sees deficits exceeding 5% of GDP until 2027. Moody’s also put a negative outlook on the U.S. triple-A credit rating this month.

The document avoided a major new drug program, something sought by the NDP party the Liberals rely on to win confidence votes in Parliament. That deal on paper keeps Trudeau in power until late 2025, a regular four-year mandate, and the NDP leader has signaled he doesn’t want an election now.

Investors got some good news with the government modifying its Canada Mortgage Bond program, instead of an earlier review that mulled its elimination. Mortgage bond sales are poised to remain at the expanded cap of CAD60 billion a year Freeland announced a few weeks ago, though the government now says it will buy back up to half of that amount each year.