Canada’s Liberals find themselves in a bind ahead of this week’s budget: the economy has recovered from the pandemic, yet Prime Minister Justin Trudeau has pledged billions in recent stimulus that would further fuel runaway inflation.
Trudeau’s Liberals will present their 2022 budget on Thursday, just seven months after promising $78 billion in recent spending in a re-election campaign.
Much of that, expected to be spread over five years, has not yet been budgeted.
But fresh fiscal spending could possibly be dangerous at a time when inflation is already running at a 30-year high. If too broad, measures could fuel further price increases and find yourself hurting lower-income Canadians.
“Whenever you take a look at the impact of this elevated inflation on lower-income households, clearly they’re hurting,” said Rebekah Young, director of fiscal and provincial economics at Scotiabank.
“But at the identical time, from an economic perspective, there’s a risk that when you put even more money at the issue, it will probably create more pressures.”
Young said major recent spending initiatives must be put aside for the near term, though total government revenues are expected to be higher than previously forecast as a result of higher inflation-linked tax revenue.
But which may be easier said than done.
The federal government has already committed to spend more on defence following Russia’s invasion of Ukraine. Trudeau’s Liberals currently spend lower than 1.4 per cent of GDP on defense, under the NATO threshold of two per cent.
The budget may also include about $2 billion on a technique to speed up Canada’s production and processing of critical minerals needed for the electrical vehicle supply chain, Reuters reported exclusively on Monday.
Green technologies and initiatives on housing can be focal points of the budget, said one senior source.
And the Liberals may have to start out to deliver a national dental-care program for low-income Canadians – a costly initiative that could be a cornerstone of a support cope with the Latest Democrats meant to maintain Trudeau in power until 2025.
Structural spending will find yourself adding to the deficit once the stronger than expected revenues aren’t any longer rolling in.
This might derail efforts to scale back Canada’s debt-to-GDP ratio, which skyrocketed throughout the pandemic amid extraordinary emergency spending and was last forecast to peak at 48 per cent this 12 months.
“Any near-term drop within the federal deficit from today’s improved economic outlook could possibly be fleeting. As such, we feel the risks to our baseline debt-to-GDP forecast are very much skewed to the upside,” said Randall Bartlett, senior director of Canadian economics at Desjardins.
Rising rates of interest – the Bank of Canada is widely expected to hike its policy rate by 50 basis points to 1 per cent at a call on April 13 – will add to debt pressures. Canada’s federal debt was last forecast to top $1.19 trillion this 12 months.
Trudeau, facing backlash over surging home prices and rents, has also promised to make housing more inexpensive, including measures to make it easier for first-time buyers to get into the market.
“That does get us right into a problem where typically the costs just adjust to reflect the development in affordability,” said Stephen Brown, senior Canada economist at Capital Economics.
