Debt to GDP ratio will fall each year even if deficit reduction is trickier.
Canada seems intent on making sure its last fiscal "anchor" of reducing debt as a share of GDP each year holds firm, a former top government adviser told MNI, to keep credibility with investors worried that deficit reduction will lose out to social spending and costly geopolitical risks.
Finance Minister Chrystia Freeland's budget Thursday spent the majority of an economic windfall -- including on new social programs -- even as output and jobs show a full rebound from the Covid recession. She also with the prime minister's backing said the debt-to-GDP ratio will fall in each of the next five years from 46.5% to 41.5%, even with deficits every year.
"It was an important signal internationally and to investors to say that Canada is serious about this, and we're going get our books back into order as quickly and as responsibly as we can," according to Elliot Hughes, a top aide to former to Freeland's predecessor Bill Morneau. He's now a Senior Advisor at Summa Strategies in Ottawa.
"Freeland I think was able to really put her imprint on this budget" by making a firm pledge on fiscal restraint, Hughes said. "There are parts of this government that I think got used to some of the spending levels we've seen over the last couple of years, and were expecting that to continue."
JUGGLING STEAK KNIVES
Freeland's budget speech also included pledges to find some spending cuts and comments around how Covid spending depleted the coffers and could not continue. She also alluded to rapid inflation at a time when sources told MNI more fiscal stimulus would keep those costs elevated, and could bring conflict with BOC tightening.
"While to outsiders, it may look like she has spent frivolously," Hughes said, "that downward track is looking more and more like the one they're going hold on to, and it will be the point that they raise the first moment that corporate Canada complains about the fiscal situation."
Bridging divides between spenders and moderates she may have to court if she runs to become the next Liberal leader whenever Justin Trudeau steps down was like trying to "walk a tightrope while juggling a set of steak knives," he said. The budget will disappoint some Canadians including executives who wanted more focus on competitiveness and families priced out of the housing market, Hughes said.
"The pain that that people are feeling today and the concerns that they have around the price of buying a house in Toronto isn't going to go away," he said. "But I don't think any any government or anybody was going to be able to solve that problem with the flip of the switch, so it's going to take time, and it's probably going to get worse before it gets better."
The budget will easily pass because the Liberals overcame their minority of seats in the House of Commons by striking a deal with the NDP to boost things like public dental care in exchange for support on confidence votes.
"Corporate Canada was hoping for more but I think under the circumstances, being an ambitious social agenda, a Liberal-NDP supply-confidence agreement, challenging and uncertain times, both economically and geopolitically," Freeland did "pretty well," he said.
The Ukraine invasion and uncertainty around Covid mean the balance of risks on deficits probably tilt more towards red ink, Hughes said. "Governments need to remain nimble and be able to act nimbly in the time of crisis," he said. "I don't think that the demands on the government are going away anytime soon."