Higher spending track still poses some risk to fiscal strength.
Finance Minister Chrystia Freeland kept earlier pledges limiting this year's deficit to CAD40 billion and a five-year path of declining deficits and debts as a share of GDP. The budget also spent much of the windfall from a strong economic rebound and raised some taxes to keep the deficit in line.
“What this government seems to have done in this budget is started from the point of: here are the commitments we’ve made around the size of the deficit in dollar terms, the size of the deficit as a share of GDP, and then they worked backwards,” said Bartlett, who has been chief economist at a University of Ottawa fiscal think-tank.
“But their spending ambitions went well beyond the revenues going to be generated from the economy,” he said. “They had to raise taxes to pay for that additional spending in order to maintain those fiscal anchors.”
Prime Minister Justin Trudeau came to power in 2015 with a pledge of modest deficits and the country hasn't had a substantial surplus since around the 2008 global financial crisis. Canada still leads other G7 nations on measures of debt relative to GDP and officials have often said protecting that advantage is a key goal.
NO NOSTALGIA FOR THE 1980s
“Credit rating agencies will be satisfied with this but it’s something that we think is subject to downside risk going forward, unless the federal government intends to continue increasing taxes,” Bartlett said.
The five-year fiscal plan must be discounted somewhat because an election due next year could see the Liberals replaced by Conservatives now leading in the polls, and they call for balancing the books. Another Trudeau win could also see the Liberals extend how they've run fiscal policy to date, Bartlett said.
“There are a lot of risks out there if we have another economic shock, so I think the federal government would be wise to rein in spending to some extent and bring down the debt-to-GDP ratio faster,” he said. “Canada ranks very well relative to other G7 countries,” Bartlett said.
Things could still be done better, he said, noting the projection shows revenue as a share of GDP will become the highest since around 2000. That was a time of tax cuts after the painful fiscal reckoning of the 1990s and big deficits of the 1980s. “The 1980s is not the fiscal era we want to look to,” he said.
