MNI PREVIEW: Canada Budget May Extend Unanchored Deficits

Canada's longest ever spell without a budget ends Monday with Finance Minister Chrystia Freeland likely maintaining record deficits absent a strong "fiscal anchor" and arguing the economy still needs unbridled assistance.

The deficit for the fiscal year that began April 1 could come in at CAD160 billion on expanded pandemic and social spending programs, according to RBC economists, larger than Freeland's Nov. 30 estimate of CAD121 billion. The previous year's shortfall will be in line with the government's estimate of CAD382 billion according to RBC. That would be 17.5% of GDP, seven times the cash record of CAD56 billion set in 2009-10 and approaching the record 22.5% of GDP set in World War II.

"This is going to be a budget about getting Canada and Canadians back to work, fulfilling the commitment in the Speech from the Throne to help support one million jobs, and help Canada heal the economic wounds of Covid-19," Freeland said at a press conference in response to a question from MNI on March 25 about fiscal restraint. Her Liberal Party colleagues have pushed hard for more spending on national childcare that has been deemed unaffordable by past governments for decades, as well as measures tackling climate change and enriched jobless benefits.

Investors should watch for a new annual debt strategy including a potential re-opening of 50-year bonds and more details on the shift to greater long-term debt sales to lock in low interest rates. The pace of new debt auctions will also play a role in the central bank's thinking on QE, given the BOC's target of at least CAD4 billion a week means it could own half the market by yearend, which some investors say will create trading frictions.

THIRD WAVE SPENDING

The government also plans to spend CAD70 billion to CAD100 billion over three years it hasn't budgeted yet, likely keeping deficits elevated. "While growth for 2021 will probably be revised higher, it is also likely that the budget does contain additional stimulus and reflects the impact of the third wave on pandemic-related support spending," Desjardins analyst Jimmy Jean wrote in a research note. Jean estimates a CAD150 billion deficit and gross bond sales of CAD255 billion this fiscal year.

Business groups have told MNI the extra money will be poorly timed, arriving after the economy has largely rebounded from the pandemic. Former top finance department official Don Drummond also told MNI the lack of a strong fiscal anchor may lull the government into a trap of rising interest costs and slower long-term growth.

While the Liberals appear to have the support of at least one of the three major opposition parties needed to survive confidence votes on the budget, there has been speculation Prime Minister Justin Trudeau will dissolve Parliament to force an election based on the budget plan. Such a move could be risky given vaccine delivery delays and because the country is in the middle of a third wave of Covid-19.