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Finance Minister Chrystia Freeland under pressure to show markets Ottawa has finances under control
“When I look at the long-term trend in the debt-to-GDP ratio, it’s trending down,” Bartlett said. Because nominal growth is forecast to be weak in the 2023/24 fiscal year, the ratio might creep up before heading downward again. Bartlett called it “just a blip on the path.”
Freeland, who is due to present the budget in March or April, has said she will take a “fiscally prudent” approach that will not hamper the central bank’s fight against inflation, which was almost three times its two per cent target in January.
But she has also promised investments in response to the U.S. Inflation Reduction Act (IRA), which contains US$369 billion in incentives for consumers and businesses to make the low-carbon transition there. She said these investments will encourage people to build the clean economy in Canada.
Many in industry say Canada must do more to be a key player in the green transition as the IRA is already spurring investment in the United States. But borrowing costs are rising and the economy could tip into recession this year, reducing tax revenues, so caution is warranted.
“At this point in the economic cycle, you’re better off saving if the spending isn’t needed,” said Rebekah Young, head of resilience economics at Scotiabank.
In the fall, Freeland forecast a gradually declining deficit and a balanced budget by 2027/28.
William Foster, vice-president and senior credit officer at Moody’s Investors Service, said Canada has committed to getting deficits “back on track” after the massive pandemic spending. Moody’s has a ‘AAA’ rating – the highest – on Canada’s sovereign bonds, with a stable outlook.
How much fiscal room is there?
“We decided to affirm the triple A rating and maintain a stable outlook… because our expectation is the government will be committed to staying on a fiscally responsible track,” Foster said.
“They’ll build themselves a buffer,” Young said, because future economic shocks could undermine growth and therefore make it more difficult to lower the ratio.
If that buffer were half of Bartlett and Young’s estimates, it would allow an additional $7.5 billion to $10 billion in annual expenditure.
“Every single automaker in North America, and there’s about 15 of them of consequence, has to electrify” by the 2030s, he said. “All of them will need to buy batteries at scale from facilities that don’t exist currently.”
© Thomson Reuters 2023
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