MNI INTERVIEW: Canada Budget To Offer Housing 'Base Hits'-Page

Canada's pending fiscal update will be limited to "base hits" of incremental measures rather than a home run that fully addresses the housing crunch as a weaker economy and other spending files burden government finances, former parliamentary budget officer Kevin Page told MNI.

Higher bond yields, slower economic growth and rising unemployment mean the budget profile will weaken by a few billion dollars to CAD45 billion in the fiscal year that began April 1 according to Page. Chrystia Freeland still has the relative luxury of a budget shortfall of just 1.5% of GDP, a pittance versus red ink being spilled in countries like the United States, Page said on the MNI FedSpeak podcast.

“The government does feel squeeze, from the point of view of just political pressure, and the bond market is providing a bit of pressure,” said Page, now President of the Institute of Fiscal Studies and Democracy at the University of Ottawa. “A series of base hits is really what they are trying to do. This is a long term challenge with respect to getting housing supply in a better place” as well as "over the next couple of elections."

Part of the need to move slowly comes from the housing market itself, as building cost remain elevated and homeowners are being stretched by a surge in mortgage rates, he said.

Canada's 10-year bond yield has climbed alongside a global selloff, reaching about 4% from lows of 2.75% about six months ago. Yields are around the highest in more than a decade, though still below the yield of 4.9% in the U.S. where investors are concerned about a rush of new bond sales. (See: MNI INTERVIEW2: Ex-BOC Chief Says Neutral Rate Is Rising)

LOTS OF SPENDING PRESSURE

The fiscal update's main audience is voters angry over a housing shortfall of 3.5 million units in a nation of 40 million people and more pressure from record immigration. Polls suggest Liberal Prime Minister Justin Trudeau would lose an election today to Conservatives assailing a plan to spend less than CAD100 billion for housing over a decade.

There are other expensive priorities like subsidizing a cleaner energy grid and ramping up military spending, Page said. The Liberal minority government could lose crucial support from the NDP if they don't meet a demand for new publicly-funded drug program.

“There will be a lot of spending pressure. These are tough times,” Page said. That will also make it more difficult to follow through on the pledge to cut billions of dollars of spending through a program review, he said.

Freeland's past budgets spent a big chunk of the windfall from a growing economy, leading to another Conservative attack Liberals have forced the BOC to jack up borrowing costs. Page said deficits aren't a major driver of inflation, speaking in a week where the Bank is expected to hold rates for a second meeting after 10 earlier hikes.

MORTGAGE BOND PROGRAM

Still, Freeland's April budget removed a projection that books could be about balanced in five years. The IMF has applauded Canada's fiscal policy while noting the sole "anchor" of reducing debt as a percentage of GDP could be strengthened. (See: MNI INTERVIEW: Trudeau Must Fix Housing Without Fanning Prices)

“The current government has really had no interest in targeting the budgetary balance year over year,” Page said, adding "it would bolster confidence" to write a stronger rule. Even so, Page's main point was Canada is still well ahead of any bondholder revolt and two-thirds of the deficit is tied to weakness in the economic cycle rather than a permanent problem.

“It’s a much bigger problem I think in terms of fiscal imbalances in the UK and the United States,” he said, adding Canada's budget could be balanced over the medium term without major difficulty.

One issue for investors and the housing market is whether Freeland announces an end to the Canada Mortgage Bond program, and she's promised to revisit the file in this update. Investors complain the program should be kept, and Freeland unexpectedly announced an expansion of CMB sales a few weeks ago. (See: MNI BRIEF: Canada Defers Any Mortgage Bond Change To Apr 2024)