Morneau Hails Status Quo Ahead of Canada’s Fall Fiscal Update

  • Finance minister to revise projections, maintain debt ratios
  • Economists see no clear need for expanded spending measures

Finance Minister Bill Morneau is signaling Canada’s sluggish economy doesn’t need any new major stimulus as he prepares to release a budget update.

Morneau said Friday he’s not moving off his stated “fiscal anchor” to lower the country’s debt ratios in coming years. That suggests he’s not considering significant alterations to the course he laid out in his debut budget, which projected nearly C$120 billion ($90 billion) in deficits over six years.

The update, to be unveiled Tuesday afternoon in Ottawa, will instead include revised growth forecasts and adopt some of the recommendations from an advisory panel that urged the creation of an infrastructure bank.

“It will give Canadians a sense of where we stand economically” and of how previously announced measures are having an impact, Morneau said in Toronto. The government is committed to remaining fiscally responsible, he added, “so the idea that we’ll reduce our net debt-to-GDP over time remains our approach to fiscal management.”

Infrastructure Bank

Prime Minister Justin Trudeau has been championing the government’s ability to spur the recovery with expanded fiscal measures, and predicted his budget would add about a half percentage point to growth over each of the next two years. He’s faced political criticism over the size of the deficits -- projected at about C$30 billion annually, or three times what he pledged during last year’s election -- and his governing Liberals have been careful to reassure investors they will be fiscally prudent.

In addition to a fresh outlook of the government’s finances, Tuesday’s update is expected to include structural measures. Morneau’s growth council, led by McKinsey & Co.’s Dominic Barton, issued its first batch of recommendations on Oct. 20. They included creating a C$200 billion infrastructure bank financed by C$40 billion in government capital; creating an agency to attract more foreign direct investment; and expanding immigration to a level Trudeau already said is unrealistic. 

The government is also considering asset sales, after a government-funded report released in February urged the privatization of airports and marine ports. The Canada Development Investment Corp. has hired Credit Suisse to advise on the matter, but Morneau said privatization efforts are “very preliminary” and that “no decisions have been made.”

Room to Spend

There is scope for Morneau to add some new spending without jeopardizing his fiscal anchor.

While growth has disappointed this year, the government may still have some reserves left over from a budget that included extremely conservative forecasts, according to Avery Shenfeld, chief economist at CIBC World Markets. “I think it’s premature to reach the conclusion they need to run larger deficits,” he said.

There could also be some leeway to ease up on how quickly the government reduces its deficits. Charles St-Arnaud, senior economist at Nomura, predicted in a report Friday that Morneau will announce an increase in investment spending of about C$5 billion for this year, and double that amount in 2017.

The March budget forecast that deficits would peak at C$29.4 billion this year before dropping to C$14.3 billion in 2020. The debt-to-GDP ratio was forecast to drop to 30.9 percent in 2020, from 32.5 percent this year. Slowing the decline in the debt ratio could add billions of additional fiscal room, and reduce the negative impact on the economy.

Battle Lines

Maybe “where the battle lines are starting to develop is: Do we really need to bring down that deficit over the medium term?” said Doug Porter, chief economist at BMO Capital Markets, adding he is skeptical of the impacts Trudeau’s deficits will have on long-term growth.

Trudeau and Morneau can nonetheless afford to spend more, according to David Madani, an economist at Capital Economics in Toronto. The government still has an “austerity mindset” on pushing the envelope on fiscal stimulus, he said. “I don’t think investors are concerned about federal finances,” Madani said, adding Bank of Canada Governor Stephen Poloz “is right when he says our finances are in good shape and we have scope.”

To be sure, if Canada’s economy begins to substantially under-perform, most economists believe more fiscal measures are the preferred approach over forcing the central bank to cut interest rates further. Which means Morneau has leeway to stick to his fiscal anchor, but maybe only for now.

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