When the Prime Minister
The Russian government presented its
in November it introduced a new fiscal anchor: a further reduction in the country's deficit-to-GDP ratio.
The measure has some budget watchers scratching their heads because Canada's G7 counterparts don't often use it as a fiscal guardrail, especially on its own.
“Nobody else is doing this,” said Mark Munger, a professor of political economy and global affairs at the University of Toronto.
“Why not say that you are trying to eliminate
or will you have a surplus by a certain year?” he added. “It would be the standard language used by most countries.”
The shift from the more common declining debt-to-GDP ratio (which the Trudeau government had promised but failed to deliver) as an anchor was subtle but important: under the new rule, Canada's debt could not only grow, but also grow relative to the size of Canada's debt.
in the coming years.
“Just cutting the deficit is good in itself, but it's not really enough,” said Charles Saint-Arnaud, chief economist at Alberta Central, who described the budget's fiscal headwinds as “weak.”
Along with a second pledge to balance the newly defined operating budget within three years, Carney's anchors have some economists scrutinizing Ottawa's finances and others warning that Canada could be on a “slippery slope” fiscally even though the country is on a “slippery slope” fiscally.
According to St. Arnaud, he remains in good standing for now.
The Parliamentary Budget Officer (PBO) was one of the biggest skeptics. In a recent report, Jason Jacques calculated that the likelihood of the government even meeting its target of lowering the deficit-to-GDP ratio over the medium term, once the anchor is subject to a stress test, is just 7.5%. He also questioned Ottawa's definitions of operating and capital expenditures, suggesting the latter were overly broad.
Speaking to a parliamentary committee on Tuesday, Jacques said the federal government should seek House of Commons approval before relinquishing any financial anchors.
“This is a change in fiscal policy that has not been discussed meaningfully on Parliament Hill,” he said. “This happened without any discussion.”
Meanwhile, Fitch Ratings Inc. released a post-budget report warning that Canada's finances are at risk of “further deterioration.” Notably, Fitch considers all levels of government when it comes to general government debt.
“Ten to fifteen years before COVID, the general government deficit was about 0.5 percent of GDP,” said Josh Grandleger, co-author of the report and director of sovereign operations at Fitch Ratings. “Right now they estimate about two percent of GDP.”
Canada currently has an AA+ rating, but its government deficit is higher than the average among its peers in this category. Canada's gross public debt is projected to reach 98.5% of GDP by 2027, almost double the AA median.
Grundleger said this does not mean there is a risk of a further downgrade of Canada's credit rating, but it does mean the agency is looking more closely at Canada's financial strength.
“It's lame when you keep changing the goals and the rules, and every year there's a reason why the goals aren't being met and they get moved,” he said. “From our perspective, there is an increasing emphasis on trust in these tools.”
In its budget review, the PBO said Ottawa's efforts to balance operating expenses depended on how it defined the other half of its budget-sharing approach – capital spending.
Based on the PBO's own definition of capital spending, which excludes items such as corporate income tax expenses, investment tax credits and operating subsidies that the federal government has included, Jacques said he doesn't think the government will reach balance within three years.
Regardless of which definition is used, Canada's total debt is expected to rise as the government makes a series of investments to boost long-term economic growth. Carney's promises to attract $500 billion in new private investment and find $60 billion in operating savings over the next five years, with its debt-to-GDP ratio expected to remain above 43 percent through the end of the decade.
Saint-Arnaud acknowledged that the budget represents an important shift in fiscal policy from the demand side of the economy to the supply side, with measures aimed at addressing Canada's challenges.
crisis.
“We are redirecting some of our financial attention to what really matters,” St. Arnaud said.
“If you can increase your potential by half a percentage point over your current level, it will bring you big returns in the long run.”
Saint-Arnaud said Canada may have to make those sacrifices now for more sustainable economic growth.
Munger also said that investments in infrastructure and large projects can produce good results, but not every dollar of government spending will result in a dollar's worth of economic growth, and that's a risk because governments don't always know what will pay off.
He pointed to the sovereign of Ottawa
which promises $925.6 million over five years to support large-scale sovereign government artificial intelligence infrastructure, an example of an initiative that is unlikely to provide a return on investment.
“Governments and civil servants are least able to decide what will work in the market and what will be commercially successful and drive growth for years to come,” he said. “They don’t have much of an understanding of it.”
Ultimately, Grandleger said deficits caused by productive spending are better for the credit profile than spending that doesn't contribute to economic growth. However, the federal government's growing debt and the costs associated with servicing that debt will put pressure on all levels of government.
“At the federal level, if they decide to increase their tax base by taxing people to support higher debt, it just means provinces have less room to raise taxes, otherwise it will start to squeeze people,” he said.
And unlike, for example, the European Union, where there is a clear mechanism for a country to leave its financial anchors, in Canada they remain more of a signal than a binding promise.
“Clearly the British or Canadian approach of saying we're going to strike is more like we're subjecting ourselves to public shaming rather than the European approach with real punishments,” Munger said.
Munger said one of the positive aspects of Canada's financial situation is that the government often borrows from domestic sources.
For example, according to Treasury Canada's debt management strategy, the projected total market debt for this year consists of $1.293 trillion in domestic bonds, $296 billion in Treasury bills and just $30 billion in foreign debt.
“We're in an absolutely fortunate position where we're basically borrowing money from ourselves,” he said.
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