Canada expected to resist new spending amid UK turmoil, analysts say – National

Prime Minister Justin Trudeau’s government is expected to avoid further stimulus when it updates its fiscal plans this fall and instead focus on debt repayment as governments around the world face greater scrutiny of managing their finances, analysts said.

The reason for the caution is clear given the market’s reaction to Britain’s plan to cut taxes without explaining how to pay for it, analysts said. The pound slumped to a record high against the US dollar and UK government bonds fell.

“It is more important than it has been for many, many years that the Federal Government reassures (investors) that it is nowhere near going the UK way,” said Royce Mendes, Chief Financial Officer. macro-strategy at Mouvement Desjardins.

Finance Minister Chrystia Freeland is due to deliver the annual fall economic statement in November.

« The government remains committed to reducing the federal debt-to-GDP ratio and federal deficits, and this year’s budget has passed that test, » said Adrienne Vaupshas, ​​press secretary in the minister’s office.

“It is important that fiscal policy does not conflict with monetary policy as we provide compassionate and targeted affordability support to Canadians,” added Vaupshas.

Looser fiscal policy could undermine the Bank of Canada’s efforts to tame inflation and economists say the federal government should postpone planned spending until next year when the economy is expected to contract.

Trudeau could therefore be forced to hold on to an expected revenue windfall, a move that goes against recent government trends.

Trudeau has spent some $290 billion in direct aid to individuals and businesses during the COVID-19 pandemic and pledged nearly $180 billion in stimulus over five years last year. Even in this year’s budget, introduced as inflation soared, it provided nearly $10 billion in new spending over five years.

Since the presentation of the 2022-23 budget in April, inflation and rising commodity prices, including oil, have led to higher tax revenues.

Scotiabank Vice President Rebekah Young estimates the windfall gains will reduce this year’s deficit to about $35 billion, or 1.2% of GDP, from the budget forecast of $52.8 billion. . The deficit reached 14.9% in 2020-2021, whereas it hovered around 1% in the years preceding the pandemic.

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The government should « repay the debt so that when there is more capacity to make new investments, it is ready to operate with it, » Young said.

Canada’s ratio of general government net debt to GDP, which includes provincial debt, is the lowest among the rich countries of the Group of Seven and the IMF expects it to fall slightly to 30.3 % of gross domestic product next year.

Still, if it were to come down faster, the government could address some long-term challenges once inflation, at 7% in August, subsides.

In particular, transitioning to a greener economy and scaling a new clean technology industry will require significant investment, the economists said.

« Right now, inflation is elevated and it has shown no signs of slowing down in terms of the underlying core measures, » Desjardins Group’s Mendes said. « This is the number one problem facing the economy. »

To soften the blow from inflation, provinces and the federal government have already announced some $21 billion in stimulus, which will fuel the economy over the coming months, Young said.

Mendes’ recommendation for the budget update is simple: “Move cautiously.