Parliamentary budget officer urges Carney to show numbers as spending rises

Article content

Canada’s budget watchdog urged Prime Minister Mark Carney to release an update on the federal government’s finances soon or risk eroding the government’s credibility with investors.

Carney is promising to spend billions on infrastructure, military equipment, housing and transportation — part of his ambitious agenda to boost the potential of the Canadian economy. Those plans, combined with slow economic growth, are causing economists to forecast a larger federal deficit this fiscal year.

But the prime minister has put off the federal budget until October, citing the trade war and the shortened spring sitting of Parliament because of an election. Normally, budget documents are brought to the legislature in March or April.

Yves Giroux, Canada’s parliamentary budget officer, said it’s “appropriate and necessary” for the government to give “at the very least an economic and fiscal update, to indicate what the path forward is.”

“There’s a lot of question marks on the government’s fiscal plan,” he said. “A budget would’ve been very helpful in clearing up the uncertainty and providing more detail.”

Some of the government’s spending plans will show up immediately: it’s promised to add about $9 billion to defence expenditures this fiscal year, a move that has drawn praise from Canada’s allies in the North Atlantic Treaty Organization.

Canadian Imperial Bank of Commerce has estimated the deficit may rise as high as 3% of gross domestic product for the fiscal year that ends in March, which would be in the $90 billion range. That would be more than double what the government projected in December. Bank of Montreal says the shortfall could easily top $70 billion.

Carney’s government is betting that planned investments will increase the longer-term growth rate of the economy, which would eventually result in stronger and more consistent streams of tax revenue.

“Canada continues to have the lowest net debt-to-GDP ratio in the G7 and is well-positioned to navigate global uncertainty,” said Audrey Milette, a spokeswoman for Finance Minister Francois-Philippe Champagne. “We’re not only strengthening our defence capacity and working towards our commitments, but we’re also supporting good jobs and long-term economic growth.”

‘Progress Costs Money’

Most economists say there there’s still room on the federal balance sheet for spending that boosts productivity and shores up the country’s depleted armed forces. But investors will be watching carefully, and the government shouldn’t necessarily expect a “warm welcome” from the bond market as it ramps up borrowing, according to CIBC.

“Overall, the significant amount of fiscal space available to Canada should be used, but progress costs money,” Ian Pollick, CIBC’s global head of fixed income, commodities and currency strategy, said in an interview.

Since the end of March, the yield on benchmark 10-year Canadian government debt has risen 38 basis points and the spread versus Treasuries has narrowed. In other words, Canada’s advantage in borrowing costs relative to the U.S. has shrunk.

Giroux said he expects the federal government to run a deficit of between $60 billion and $70 billion this fiscal year. The government is conducting a review of federal spending, but Carney has said he would leave social programs intact. The prime minister is looking to artificial intelligence and technological innovation to help reduce the cost of public services.

Giroux doubts that approach will yield results quickly or easily. “Even in the medium term, it’s probably optimistic to think that there’ll be significant savings, unless of course the government decides to let go of certain programs, grants and contributions,” he said.

CIBC’s Pollick estimates the term premium on 10-year Canada bonds is 30 basis points higher since Carney’s Liberal Party won the election on April 28. He attributes at least of a third of that to the government’s plans to borrow more.

“The fiscal stance from Carney was pretty clear,” Taylor Schleich, a rates strategist at National Bank of Canada, said by email. “They’re not so worried about running a big deficit this year.”

Deficits have often been an important part of political discourse in Canada. In the mid-1990s, the federal government made major cuts to programs and eventually achieved years of budget surpluses. But since the global financial crisis of 2008, it has rarely come close to a balanced budget.

The budget delay “is defensible from the perspective that the outcome of trade negotiations will have a huge impact on revenues and expenses,” Benjamin Reitzes, rates and macro strategist with Bank of Montreal, said by email, “But there’s a risk future governments may use this as a precedent to do the same.”

Canada is ranked AAA from S&P Global Ratings and Moody’s Ratings, but Fitch, which rates the country AA+, has warned that structural deficits may add pressure to the country’s credit profile.

— With assistance from Thomas Seal.