Finance Minister Freeland drops projection for balanced budget in five years.
Healthcare funding including a rollout of expanded dental benefits sought by the New Democrats propping up Prime Minister Justin Trudeau’s minority government comes to CAD3.6 billion in the coming fiscal year. The weaker economy drained another CAD4.7 billion.
Freeland aims to restore her goal of lowering debt-to-GDP over the rest of the five-year forecast and said her budget is restrained to avoid boosting inflation and making the Bank of Canada’s job harder. The fiscal plan still scrapped an earlier projection to balance the books over five years, instead leaving in place a CAD14 billion shortfall in the final year.
The debt-to-GDP ratio declines 39.9% over five years, while the deficit as share of GDP narrows from 1.4% to 0.4%. The federal debt-to-GDP ratio was 31.2% before the pandemic, though it was also well over 60% through most of the 1990s when there was a painful reckoning in foreign bond markets.
“Our country has a proud tradition of fiscal responsibility. That is a tradition we are determined to uphold,” Freeland said in the text of her speech to parliament.
She pointed to targeted spending that won’t add “fuel to the fire of inflation” such a grocery rebate for low-income families, one-time payments costing CAD2.5 billion. The budget also relies on efficiencies worth CAD2.8 billion this year.
Canada hasn’t run a substantial budget surplus since 2008. The current government had already abandoned other fiscal “anchors” except for ensuring debt falls each year as a percentage of GDP, a measure some economists say is flawed. This year is an example where GDP slows and the government doesn’t make difficult cuts to meet its austerity goal.
Despite Freeland’s advance billing of a budget that would keep Canadian companies competitive following the U.S Inflation Reduction Act, Canada’s budget devoted a trivial CAD1.2 billion this year to greener energy sources. Funding for that file is budgeted to reach CAD6.3 billion in the fifth year of the plan.
U.S. legislation calls for about USD370 billion of spending over 10 years on energy security and climate change programs. U.S. GDP was about 11 times Canada’s last year according to IMF figures, meaning an equivalent Canadian program would cost about USD35 billion a year.
The budget is based on a private-sector consensus forecast calling for a mild recession with full-year real GDP slowing to 0.3% from 3.4% in 2022. The projected slowdown this year includes a “shallow” recession where output declines 0.4%.
Unemployment rises to 6.3% by yearend from today’s record lows around 5%. Inflation slows to about 3% in the third quarter and near the Bank of Canada’s 2% target in the second quarter of next year under the projections.
One of the biggest cost pressures is the CAD198 billion Canada is sending provincial governments to run health-care programs over the next decade, a deal announced earlier this year.
The Bank of Canada Act will be amended so it can temporarily withhold remittances to the government until the negative equity position generated after losses on its QE program are made up.
The central bank has hiked to 4.5% from a record low 0.25% since last year and policymakers say they are likely done unless inflation remains stubborn.
Government debt charges rise CAD0.5 billion this coming fiscal year relative to the fall budget update, and by CAD5.3 billion in five years, the budget showed.
Economists see the Bank holding the key lending rate until this fall then to below 3% by the end of next year, the budget report showed, also noting the recent collapse of SVB poses downside risk.
“Continued progress on reducing inflation will be needed over the coming year to ensure that this period of elevated inflation is only temporary,” the budget said. “There remains uncertainty about how long interest rates around the world will need to remain elevated.”
