According to analysts, Prime Minister Justin Trudeau should cut back on his spending as Canada struggles with a potential recession and the biggest debt payments it has seen in over 20 years. This will help him avoid being forced to make difficult policy decisions in the future.
The Liberal government under Trudeau is known for its audacious spending. After falling behind in the polls in 2015, he ran on a platform of running deficits to support public infrastructure, and he won. During the pandemic’s economic crisis, his administration ran Canada’s largest deficit ever.
Nonetheless, the cost of debt payment is getting close to a critical 10% of revenue, which some economists believe is necessary to avoid burdening future generations or jeopardizing government programs. They predict that since bond yields spiked higher globally in recent weeks, those debt payments will probably increase even more.
According to Doug Porter, chief economist at BMO Capital Markets, “the market dictating to you what you have to do with fiscal policy” is the risk of not cutting expenditure immediately.
“I do think they have to trim the sails a bit,” he said.
However, it appears that more spending may be forthcoming. The Fall Economic Statement (FES), which might be released as early as next week, is anticipated to include initiatives announced by Finance Minister Chrystia Freeland. These measures include resources to assist Canadians in addressing housing and affordability.
The nation has the lowest deficit and net debt-to-gross domestic product among the G7, according to the finance ministry, which cited the International Monetary Fund.
“Canada’s economic plan is prudent, sustainable, and cost-effective,” stated Katherine Cuplinskas, a ministry representative.
Trudeau’s popularity is currently at an all-time low according to polls, but unlike in 2015, deficit spending won’t help his cause without making it more difficult for the Bank of Canada (BoC) to control inflation.
BoC Governor Tiff Macklem told reporters last week that under current expenditure forecasts, the federal and provincial governments will already be contributing to inflation in 2019.
“It’s going to be easier to get inflation down if monetary and fiscal policy are rowing in the same direction,” Macklem stated.
The medium-term trend of the debt-to-GDP ratio is intended to stabilize the budgetary outlook, according to the Trudeau administration. If they wish to achieve this aim, there isn’t much room for more spending, analysts say, especially because the economy already seems to be in a slight recession.
Canada has the lowest general government net debt of any G7 nation, which is offset by pension assets and includes borrowing by provinces and municipalities. However, its gross debt, predicted to be 106.4% of GDP in 2023, is greater than that of Germany and the UK, according to IMF data.
The government has kept spending this year on programs including tax breaks for building new rental apartments and supply chain incentives for electric vehicles.
“They’re rapidly consuming whatever financial room they have,” Randall Bartlett, an economist at Desjardins, said. Prior to the summer, he had calculated that the government could spend roughly C$13 billion ($9.4 billion) annually and prevent the debt-to-GDP ratio from increasing.
This increased spending has not yet been totaled by the government, but it will be detailed in the next FES.
Another potential indicator of weaker-than-expected government finances, according to Simon Deeley, director of Canada rates strategy at RBC Dominion Securities Inc., is the high issue of T-bills in recent months.
Trudeau may be able to hold onto power for an additional two years until the conclusion of his term if the opposition New Democrats continue to back his minority administration.
However, in exchange for that support, expensive requests are made, such as legislation establishing a national prescription drug payment program, which the parliamentary budget director estimates will cost C$11.2 billion in the first year alone.
“Credit rating agencies will start asking a lot of questions if they proceed with things like pharmacare, or are much more aggressive on housing,” stated Robert Asselin, a former finance ministry official and senior vice president of policy at the Business Council of Canada.
In June 2020, Fitch Ratings downgraded Canada’s triple-A credit rating because to pandemic spending. Canada maintains its top grade according to S&P Global Ratings, DBRS Morningstar, and Moody’s Investors Service.
As debt servicing costs rise and GDP slows, “we’re monitoring the political dynamics in the country,” said Julia Smith, lead analyst for Canada at S&P Global Ratings, adding that “some decisions will have to be made potentially on other policy initiatives.”