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(RPT) MNI INTERVIEW: Canada Lacks Fiscal Restraint-Ex Deputy

Source: Bank of Canada
(MNI) OTTAWA
OTTAWA (MNI)

Canada's fiscal update showed little of the restraint touted by Finance Minister Chrystia Freeland and pressure to spend may break open in next year's full budget and wipe out projections of a return to a surplus in five years, former top finance department official Don Drummond told MNI.

The fiscal update Thursday spoke about targeted spending and holding back on big projects because stimulus would make the Bank of Canada's inflation battle more difficult. While the economic rebound and inflation pared Canada's deficit forecasts in coming years, new spending has already taken up a good chunk of the windfall.

“They want to spend, there’s no doubt about that, and if they are given the opportunity they will,” Drummond said Friday. “Given the disaster in Britain, they sensed that the time to do it wasn’t now," he said in reference to turmoil in the gilt market as investors rejected a fiscal plan for unfunded tax cuts.

It's faulty logic to credit Canada for spending less than might have been expected when politicians created the sense of more spending in the first place, Drummond said. It's also wrong to tout a smaller deficit as true restraint with the economy at or beyond full capacity, he said.

TEMPTING PERMANENT WINDFALL

“If you’re running a deficit, you are providing stimulus, end of sentence,” Drummond said. “They are making the Bank of Canada’s job harder, but not by a huge amount.” The budget update pared the deficit to 1.3% of GDP for the fiscal year that began in April, from an earlier estimate of 2%.

The Bank of Canada may still pause after one final quarter-point move at its December meeting, Drummond said. That's largely because Canadians are carrying larger debts and may pull back spending faster.

The Bank is weighing the risk against overdoing it as the lagged effects of 350bps of hikes this year take hold against the damage from lingering high inflation, Drummond said. “Their calculation would be that it’s better having gone too far than to make the same mistake twice” of under-estimating inflation, he said.

Whatever happens to the inflation rate, the level of prices has lurched permanently higher and will create a persistent revenue windfall, Drummond said. The problem is the sense of fuller coffers will tempt the government to keep spending and miss the projection for a CAD4.5 billion surplus in five years, he said.

SURPLUS ONLY BY ACCIDENT

Even without new programs such as an industrial policy Freeland has pledged for next spring's full budget to counter subsidies in the U.S. Inflation Reduction Act, spending is on rapid autopilot when it comes to health care, Drummond said.

The budget plan showed the Canada Health Transfer will climb 29% in five years, to CAD45.2 billion to CAD58.5 billion. The legislated program sending money to provincial governments is indexed to growth in nominal GDP, meaning it climbs with inflation.

The balanced budget "won’t happen, unless it’s purely by accident," he said. “It’s very difficult to govern when you have surpluses, because for every dollar you have there’s a demand to spend.” Drummond, like the IMF, suggested Freeland's lone fiscal anchor of lowering debt as a percentage of GDP isn't strong enough.

“I find it interesting the headline they didn’t spend as much as was expected, well that’s them manipulating us," Drummond said. "They created the expectation they might spend like crazy, and then they didn’t and everybody congratulates them, how does that work?”

MNI Ottawa Bureau | +1 613-314-9647 | greg.quinn@marketnews.com
MNI Ottawa Bureau | +1 613-314-9647 | greg.quinn@marketnews.com

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