Trudeau has probably overcome the deficit barrier, says PBO

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Canada's budget watchdog says Justin Trudeau's government has likely cleared a self-imposed fiscal barrier and warns of the consequences of delaying the release of final spending and revenue figures.

Yves Giroux, head of the country's parliamentary budget, expects the federal government to have a deficit of $46.8 billion in 2023-24. That figure is higher than the $40 billion forecast by Finance Minister Chrystia Freeland in the April budget, and would break a key fiscal promise she has offered as evidence of her party's spending discipline.

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The government has until the end of the year to provide the figures, but typically publishes them in October, as it did last year. The delay raises questions about whether the numbers are worse than expected, which would add complications for Trudeau as his party struggles to regain traction with the electorate.

In an interview, Giroux said the holdup “goes against fiscal transparency and accountability” and leaves the country's lawmakers to vote and approve hundreds of billions of dollars in spending and tax measures without knowing the status of the country's finances. The figures are finalized when the fiscal year's income and expense counts are added up, and the amount of time it takes to complete that process can vary.

Giroux's office has been outspoken about setting a firm date for the release of fiscal figures, suggesting a deadline of September 30 each year rather than letting the incumbent government deliver the final tally at its convenience. .

“If it's good news, they can take advantage of it. If it's bad news, they may try to find a more appropriate time where it will attract less attention,” Giroux said. “It is very likely that the government has missed its own self-imposed target of a $40 billion deficit.”

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The government has also not yet announced when it plans to provide an update on Canada's current and future fiscal and debt issuance outlook, which, in recent years, has come in the form of the so-called fall economic statement. This is usually a mini-budget that outlines expected changes in spending and income, and may also contain final figures for 2023-24.

Giroux, who became the country's third-largest parliamentary budget official in 2018, is quick to point out that the government's fiscal barriers were selected by the Liberals themselves. Failure to meet those goals may affect credibility in the eyes of Canadians, but does not expect major consequences in the markets.

“They need to exceed their fiscal targets quite significantly for that to have a material impact on the cost of financing,” he said.

Freeland's office did not immediately respond to a request for comment. He was scheduled to hold a news conference in Ottawa on Tuesday afternoon.

Spending pressures

As the Bank of Canada struggled to control inflation, Freeland faced pressure from economists to restrict public spending. He laid out his fiscal anchor in last November's fall economic statement, pledging to keep the 2023-24 deficit at or below the $40.1 billion forecast in the 2023 budget, and maintaining a declining deficit-to-GDP ratio.

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Currently, the deficit is about 1.4 per cent of Canada's gross domestic product, compared with more than six per cent in the United States, but the northern nation does not enjoy the luxury of having the world's reserve currency. Still, Canada has a AAA credit rating and investors seem happy to buy the country's debt.

The spread between Canadian and U.S. 10-year yields is now more than 100 basis points, near the widest on record. While this partly reflects slower growth and cooler inflation prospects in Canada, it is also a sign that markets may have less trouble with the size of the country's federal deficits relative to those of the US.

At the height of peak inflation, it was politically important for the government to assure Canadians that it was helping to cool price pressures and allowing Bank of Canada Governor Tiff Macklem to begin cutting interest rates. Affordability has become a top voter concern, and Trudeau's Liberals have been about 20 points behind the Conservatives in most polls for more than a year.

Now, it is less clear that fiscal restraint has the same perceived benefit. Since June, the central bank has cut interest rates from five percent to 3.75 percent, and inflation is hovering around the two percent inflation target.

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Speaking to lawmakers last month, Macklem said he saw no need to comment on fiscal policy now that price pressures are closer to target, a contrast to his comments last year when he warned that policymakers should consider the inflationary consequences of their policies. spent. With economic growth waning, the central bank is actually looking for the country's growth to recover for a soft landing.

The Trudeau government may also come under pressure to spend more and offer boutique spending or tax breaks ahead of the election scheduled for late October 2025. While consumer confidence is rising, eroded purchasing power remains a challenge for consumers. governments in power around the world.

On Monday, the government released supplementary spending estimates showing higher spending for 2024-25.

Whether or not it is publicly or politically desirable, there may be more room for Canada's government to run deeper deficits. Giroux said the country's fiscal trajectory is sustainable in the long term.

“There is room to increase spending, reduce taxes or a combination of both. That does not mean that it is desirable to do so,” he said.

“It may be desirable to invest in some areas or reduce taxes in others, but perhaps the best path is to reduce the debt-to-GDP ratio, and that depends on the electorate.”

—With the help of Jay Zhao-Murray.

Bloomberg.com

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