MNI POLICY: Canada Must Justify Spending, Needs Anchor- IMF

The IMF warned Canada's plan to spend up to CAD100 billion beyond pandemic relief hasn't been well justified and a medium-term fiscal anchor is needed through a period where the government is leaning on low central bank interest rates to help cover record deficits.

"While Canada still has some fiscal space, prior to embarking on any new spending, it would be important to ensure its composition achieves well-defined objectives, including enhancing long-term growth," the Washington-based fund said in an annual review Thursday. "The federal government's commitment to spend up to 4% of GDP over the next three years to support the recovery needs further justification."

The IMF's views are in line with what local business groups and opposition politicians have told MNI as Finance Minister Chrystia Freeland is working on her first budget in more than two years. Prime Minister Justin Trudeau's Liberal government lacks a majority in the House of Commons and the budget could be a flashpoint for triggering an early election over the fiscal plan or Canada's lagging behind the U.S. on vaccine rollouts.

Policy makers must balance medium term fiscal restraint against the need to avoid withdrawing policy support too early as the pandemic is brought under control, the fund said. Canada could consider stronger fiscal stabilizers such as reform to employment insurance benefits, a system that nearly collapsed as about 8 million people were diverted into a special relief program last year with many gig workers unable to access regular benefits.

Prime Minister Trudeau says the government will do whatever it takes to support households through the pandemic, and abandoned some fiscal anchors even before the pandemic struck. General gross government debt has jumped to about 114% from 87%, with the burden eased by today's low borrowing costs.

"This may put pressure on the central bank to not raise interest rates if inflation exceeds the target, especially given the relatively short maturity structure of recently-issued federal debt and highly-indebted firms and households. Clear and credible communication of objectives and a commitment to the 2% inflation target will thus remain key," the IMF said.