MNI: Canada Should Pare Deficits With Fiscal Anchor, IMF Says

Canada should reduce budget deficits and implement a stronger fiscal "anchor" to keep things on track, the IMF said just before Finance Minister Chrystia Freeland gives a fiscal update expected to show a windfall after the end of most Covid restrictions.

Smaller deficits would help slow inflation and the government could add to stability by adopting more rules-based automatic stimulus programs, the IMF said Wednesday in a Regional Economic Outlook for the Western Hemisphere. "To enhance fiscal credibility and transparency, the federal government could strengthen its medium-term fiscal framework by adopting a specific debt anchor, supported by an operational rule to determine how the fiscal position reverts to the debt anchor after shocks," the IMF said.

Canada's Liberals have retained only one fiscal anchor since taking power in 2015 on a platform of small deficits, ensuring debt declines as a share of GDP each year. Some economists have said that's weak and the government needs to quicken fiscal consolidation. (See: Canada Should End Stimulus Symmetrically- Ex Cabinet Czar)

Freeland's last budget from April spent most of the windfall from the economic rebound and she's indicated Thursday's update won't add to the BOC's problems by introducing inflationary spending. Canada has recorded a CAD3.9 billion surplus from April to August as Covid spending wrapped up and inflation boosted tax receipts. That suggests upside to the April projection for a CAD52.8 billion deficit for this fiscal year equal to 2% of GDP.