MNI: Canada Trims Deficit, Spends Over Half Recovery Windfall

Canada's Liberal Finance Minister Chrystia Freeland pared deficit projections while spending more than half the windfall from an economic rebound to fund election promises and backstop a deal with the left-leaning NDP in a budget presented Thursday.

The CAD52.8 billion deficit for the fiscal year that opened April 1 is equal to 2% of GDP, and the budget remains in deficit through the projection period ending in 2026-27 when it narrows to 0.3% of GDP. Federal debt as a percentage of GDP, the lone "fiscal anchor" the government has stuck to since coming to power in 2015, is seen steadily declining from 45.1% to 41.5% from this fiscal year to 2026-27. It was 31.2% before Covid.

This year's books see a CAD14.3 billion improvement based on an economy that's more than recovered jobs and output lost during the Covid recession and higher prices for exported commodities since Russia's invasion of Ukraine. Some CAD8.7 billion of that windfall goes to spending on a new public dental care program the NDP demanded, military equipment, slowing climate change and an attempt to double the pace of homebuilding with new buyers being priced out some major cities.

The biggest economic gain was in the fiscal year that closed at the end of March, cutting the deficit to CAD113.8 billion from an earlier estimate of CAD144.5 billion.

The budget imposes new taxes on large financial companies, starts a review of digital currencies including one backed by the central bank, and bans most foreign homebuyers for the next two years. With voters angry about inflation and a housing squeeze, the budget lacked a singular big-ticket item investors feared would clash with Bank of Canada tightening to cool the fastest price gains in three decades.

INFLATION WOES

"Canada has come roaring back," Freeland said in a budget speech. "We are absolutely determined that our debt-to-GDP ratio must continue to decline. Our pandemic deficits are and must continue to be reduced. The extraordinary debts we incurred to keep Canadians safe and solvent must be paid down."

Red ink has done little to disturb Canada's top credit ratings or 10-year bond yields that even after jumping lately on global inflation pressures remain about 2.6%. That's less than budget projections calling for 3.9% inflation this year, based on a survey of private-sector economists taken in early February. The forecast also saw GDP growth of 4.2% this year and 2.8% in 2023, and the budget said global growth is at risk from Russia's aggression.

Business groups have criticized Freeland's deficit spending beyond what's needed to tackle the pandemic. Former BOC Governor David Dodge told MNI he worried the budget would focus on quick-fixes that would frustrate needed adjustments rebalancing supply and demand. Investors predict the Bank will hike 50bp on Wednesday following a 25bp move last month.

"The Bank of Canada has been clear that it will use its monetary policy tools to return inflation to the 2% target and keep inflation expectations well anchored," the budget report said.

The fiscal plan faces easy passage thanks to a recent agreement giving Justin Trudeau's minority Liberal government support from the New Democrats, which remains in place into 2025 in line with a majority government's four-year mandate. Without that deal there was a small risk the government would have collapsed on a defeated budget less than a year after the last election.

Source: Finance Department