MNI INTERVIEW: Canada Fiscal Guardrail a Distant Goal: Antunes

Canada's pledge to restore "fiscal guardrails" may not be fulfilled soon and end up being weak, leaving doubts about long-term debt sustainability, government adviser and Conference Board of Canada chief economist Pedro Antunes told MNI.

Finance Minister Chrystia Freeland on Monday said fiscal guidelines her Liberal government had veered away from even before the pandemic will return when the job market and other indicators show the economy has moved past the health crisis.

The pandemic will hold back nominal GDP by a cumulative CAD500 billion over the next four years, squeezing personal incomes and tax revenue, said Antunes, who used to work in the central bank's domestic forecasting branch. At the same time, Canada is moving to set up new or expanded social programs, and plans for another CAD100 billion of spending even after the economy stabilizes, he said.

"One of the things that we would have liked to have seen is more of a longer term path, at least we do have a deficit laid out over the next four or five years, and to me the challenge will be post Covid crisis, how do we get the fiscal situation into order," Antunes said of fiscal rules. The budget update showed a record CAD382 billion deficit this year, or 17.5% of GDP, and remaining in the red into 2026.

"These are all very well intended spending programs, but if you're going to put them in place you also need an addition to your revenue stream to be able to afford it," he said. "We can't run these deep deficits forever," said Antunes, who has also testified at Parliament on the economy.

The government's own survey of private forecasters showed it will be some time before the job market is strong enough to raise the guardrails again. The unemployment rate won't return to record lows set before the pandemic through a projection laid out until 2025, instead bottoming out at 6% in 2024.

The government targeted the ratio of debt to GDP before the pandemic and "over the long term need to see that reduced," Antunes said. Other options governments have tried include seeking to balance the budget when the economy is near its peak and balanced budget laws, he said.

Canada should also be aware of the combined federal and provincial debt as a share of GDP, not just the federal debt, and that figure looks on course to reach 90%, Antunes said.

"It would be fiscally prudent to shoot for more of a balanced budget in a stronger economy," he said.

The government appears more likely to return to the goal of lowering the debt-to-GDP ratio, he said, noting that has a big flaw. When the economy shrinks "you have no control over the denominator, and that's just what happened in 2020," he said.

The government has done fine work in quickly rolling out major support to households this year, he said. But its finances may also be squeezed over time if interest rates surge, or if the ability to raise taxes is limited as provincial governments also seek to close their budget gaps, Antunes said.