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Canada also booked a record CAD354B deficit for the prior fiscal year.
Canadian Finance Minister Chrystia Freeland on Monday unveiled an increase in this year's budget deficit to CAD155 billion from an earlier estimate of CAD121 billion, spending beyond the windfall from Covid-19 vaccines on relief checks and a new national daycare program.
While the stronger economy improved government finances by CAD16 billion since an informal November fiscal update, the Freeland budget allocated CAD49 billion of new measures for the fiscal year that began April 1.
Freeland also pushed ahead with a plan to spend up to CAD100 billion over the next three years on economic stimulus, extra spending that remains opaque in the main budget estimates. Parliament's budget officer and business groups have told MNI the extra spending is questionable because most will come after the economy has rebounded and may imperil long-term finances.
"We must punch our way out of the COVID recession," Freeland said in a budget speech. "We will continue to do whatever it takes. Our government is prepared to extend support measures, as long as the fight against this virus requires."
NEW DEBT STRATEGY
The relief follows a downturn last year that has little comparison outside the Great Depression, which at one point left millions of Canadians unemployed or working greatly reduced hours. Still, the gap from pre-pandemic levels has since shrunk to about 300,000 jobs.
The government says low debt relative to G7 peers and rock-bottom interest rates provide the means to do what's needed. An annual debt strategy called for doubling the share of long-term bond auctions, a re-opening of the 50-year bond this year and more sales beyond that, which will bring the average term to maturity to a four-decade high of 42%.
Government bond yields have remained at or near record lows through the pandemic, with investors shrugging off Fitch's move to strip Canada of its triple-A credit rating on June 24.
The first budget in more than two years also closed the books on the fiscal period that ended March 31, with a record deficit of CAD354 billion that was smaller than the November estimate of CAD382 billion. The deficit narrows to CAD60 billion next year, still several times greater than what the Liberals pledged when they took office.
VOTE OF CONFIDENCE NEEDED
The deficits for this year and last year are three times and six times greater than the postwar cash record of CAD56.4 billion set in 2009-10. The shortfalls amount to 6.4% and 16.1% of GDP, rivaling the postwar record of 8.1% in 1984 and the record 22.5% of GDP set during World War II.
Federal debt rises from CAD721 billion before the pandemic to CAD1.23 trillion this fiscal year and CAD1.29 trillion next year, or from 31.2% to 50.7% of GDP. The debt-to-GDP ratio was well over 60% through most of the 1990s when there was a painful reckoning in foreign bond markets. Freeland pledged to restrain debt as a share of GDP over the medium term, an approach a senior former finance official told MNI is weak.
Prime Minister Justin Trudeau's minority Liberal government went more than two years without a full budget, longer than even two World Wars and the Great Depression, arguing the economy was too unstable to present spending plans to Parliament. As it turned out, the budget comes following a week of record caseloads and hospitalizations in some regions as variants of Covid-19 spread.
In a scenario of "escalated" pandemic restrictions and spending the CAD100 billion, deficits could settle at CAD399 billion in the fiscal year that ended March 31, CAD167 billion this year and CAD110 billion next year.
NEW CHILDCARE PROGRAM
While the three main opposition parties could combine to reject the budget and force an election, even the Conservatives have said seeking balance anytime soon is unwise. There has also been media speculation Trudeau could use the budget to force an early election, though the third Covid wave would make any campaign difficult.
One signature policy pitched at voters is a commitment to help create nationwide daycare spaces that cost parents just CAD10 a day within five years, backed by government funding of CAD8.3 billion annually. The plan likely needs backing from provincial governments that may be reluctant to take on a potentially underfunded program, though a similar measure in Quebec has had success.
The 724-page budget also extends enriched jobless benefits for a year until the fall of next 2022, and prolongs wage and rent subsidies until the end of September.
Canada will start taxing "vacant property owned by non-resident, non-Canadians" on Jan. 1, and reiterated a plan to tax large digital corporations until the OECD builds a global framework, a decision Freeland said should come in the next few months.