MNI INTERVIEW: Canada Faces Permanent Deficit, Risks Inflation

Canada runs the risk of a “permanent” budget deficit, potentially fueling inflation, as lawmakers from across the political spectrum move away from previous commitments to fiscal balance, the country's independent Parliamentary Budget Officer told MNI.

"The balanced budgets come hell or high water that we heard in the late 1990s have not been heard in a long time. So there seems to be increasing comfort with a permanent deficit," said Yves Giroux, who reported earlier this week that that tens of billions of dollars of government spending commitments aimed at restoring the job market from the pandemic are unnecessary.

With employment and hours worked rebounding, more spending could prop up inflation instead, he said.

"If you have an economy that's already running at a healthy pace and you provide additional government spending, then there's a risk," said Giroux, who before leading the budget office directed the finance department's social policy division. "There's a clear risk that it will either create inflationary pressures, or it will result in increased imports."

FRAYING FISCAL PROMISES

The government risks failing to comply with its "fiscal anchor" of lowering debt as a percentage of GDP, and its talk of limiting deficits in coming years to about 1% of GDP may also fail to be reflected in reality, he said.

While federal finances remain stable in the long term, provincial governments may struggle as they deal with health care costs and aging populations.

"The common mistake is to look in isolation at each level of government, but in the end it's the same taxpayers supporting both levels of government," Giroux said. "So if because the fiscal room exists at the federal level, the feds spend it all, it means that there is some fiscal tightening that has to take place at the provincial level."

Consensus around fiscal discipline seems to have faded around the 2015 election when Liberal Prime Minister Justin Trudeau was first elected, said Giroux, who conceded that while faster inflation may drive up interest rates and worsen deficit dynamics, it also boosts tax revenue by lifting nominal GDP.

Early in the pandemic opposition parties holding a majority of House of Commons seats gave Trudeau emergency spending powers with few legislative constraints, and even the traditional fiscal hawks in the Conservative Party fought last year's election with a plan for a decade of red ink.

"We serve parliamentarians of all stripes, we tell them the same things, whether they like it or not, and we go on with our job but it's true that there seems to be a greater comfort with deficits," Giroux said.

Trudeau signaled at a press conference just after the budget office's report that he plans to press ahead with deficit spending. Inflation is largely a global phenomenon, he said, and spending is affordable because of Canada's low debt before the pandemic.

Canada hasn't run a substantial budget surplus since 2008 and the deficit swelled to a record CAD328 billion or 14.8% of GDP as the government tackled Covid-19. The shortfall is expected to shrink to CAD58 billion in fiscal 2022-23 and to CAD22.7 billion by 2025-26, less than 1% of GDP.