MNI INTERVIEW: Weak Growth, Election Dent Canada Fiscal Anchor

MNI (OTTAWA) - Canada's fiscal "anchors" are at risk of breaking under a frail economy, the threat of U.S. trade protectionism and the government's inclination to bolster voter sentiment ahead of an election due next year, a former top adviser to the finance minister told MNI.

Commitments continue piling up including a promise to boost military spending to 2% of GDP and a recent costly court settlement with indigenous groups, said Robert Asselin, who has advised the finance minister and prime minister. Chrystia Freeland in April again revised fiscal "anchors" to keeping deficits below CAD40 billion and lowering debt relative to GDP, while Asselin pointed to Friday's report showing program spending up 15% in April and May from a year earlier and debt service costs 34% higher.

“All this together for me points to a deteriorating picture,” said Asselin, senior vice president of policy at the Business Council of Canada. “It’s hard to reconcile how you can move the debt to GDP ratio downwards, and then obviously higher interest rates on debt servicing.” (See: MNI INTERVIEW: Canada Budget Leans To Largesse - CFIB's Kelly) 

The government is expected to present a fall update and a budget next spring ahead of elections due by late 2025. Polls show Justin Trudeau's Liberals poised to lose to Conservatives and local media citing unnamed sources say Freeland might be replaced with Mark Carney in a bid to turn things around. Dominant voter concerns are the cost of living and a housing squeeze, unemployment is rising and many economists say GDP per person is falling.

While inflation is slowing and the Bank of Canada cut interest rates in June and July, Asselin said it's hard to see enough improvement to take pressure off the Liberals. “If you look at something you bought three years ago, two-and-a-half years ago compared to today, in many cases you’re looking at a 15% price level increase,” Asselin said. “It will take a long time for the sentiment to go away.”

HEAVY LIFTING

Loose fiscal policy has hindered the Bank's inflation fight, and little room remains to launch new programs, he said. 

"It’s the monetary policy side of the equation that did the heavy lifting -- if anything, they probably had to keep rates higher than they should have for longer because of fiscal policy," Asselin said.

"All the choices they have made on spending have led them to a corner, and now they are stuck with either raising more revenues, which is disastrous at a moment where you need more investment and more confidence in growth, or cutting the very things that they told us that were great. Or obviously not honoring their fiscal commitments."

SCOPE FOR MORE CUTS

The BOC hiked rates 10 times from 0.25% to 5% including a shock 100bp move, before cutting a quarter point in June and July.

“There is scope for another 150 basis points of cuts, maybe through the end of next year but the pace of these cuts will depend on how volatile things are,” Asselin said.

One source of tumult are upcoming U.S. presidential elections that could boost rotectionism from the buyer of three-quarters of Canada's exports, Asselin said.  "The lesson I think we learned from Trump 1.0, and I was in government then, is learn not to be surprised but to be proactive, make sure you anticipate the worst outcome.”