MNI INTERVIEW: Canada Deficit May Reach $450bln, Pressure BOC

Canada's federal budget deficit may reach CAD450 billion this fiscal year based on the government's new economic plan, much higher than officially indicated up to now and potentially heaping unwelcome pressure on the central bank, Business Council of Canada vice president and former budget director Robert Asselin told MNI Thursday.

The federal debt is likely to climb to CAD1.2 trillion, and while the government said low interest rates make borrowing more affordable, that may not the case five years from now when a good part of debt must be refinanced, said Asselin, who served as Budget and Policy Director to former Finance Minister Bill Morneau from 2015 to 2017 and has also been a prime ministerial adviser.

"That's worrisome, and it just creates a lot of uncertainty on whether the government will raise taxes going forward, which obviously isn't good for business investment," he said in an interview .

In July, the government said it anticipated a CAD343 billion shortfall and it has since laid out an additional CAD39 billion in jobless benefit costs. Further spending promises, but without a price tag, were signaled on Wednesday when Prime Minister Justin Trudeau promised moves towards a publicly-funded drug plan, nationwide child care and investments to fight climate change in a Throne Speech to re-open parliament.

"If you look at the long list of things they said they would do in the Speech from the Throne, it's not difficult to see a deficit that would come around 450 (billion) this year," said Asselin. "People accept that it's not time to cut necessarily, but you would want to see measures that are focused on productivity."

PRESSURE ON BANK OF CANADA

Spending on such a scale will rely on the Bank of Canada keeping interest rates low, he noted. The BOC has pledged to buy at least CAD5 billion a week of federal bonds until the recovery from the Covid slump is well underway, although it emphasizes that its policy is grounded in its main mandate of bringing inflation back to 2%.

"It certainly puts a lot of pressure on monetary policy that I think in a way is a bit worrying," Asselin said.

The Throne Speech requires a confidence vote, and all three opposition parties say they don't support it or have demanded additional measures. The Liberals lack a majority in the House of Commons and face an early election if all three parties vote down the plan, though Asselin said Trudeau appears to have delivered an early campaign platform to run on anyways.

"I don't think personally there will be an election, I think the other parties understand that it's probably not to their advantage, especially the NDP, to trigger something in the middle of a crisis," Asselin said.