Monday was the day that satire died in a parliamentary committee.
Chrystia Freeland was asked whether the revised 2023/24 deficit in next week’s fall economic statement would be higher or lower than $60 billion, which is around $20 billion more than she said it would be in the last budget.
The finance minister assumed the look of an exasperated kindergarten teacher — you know the look — and scolded the Conservatives for even raising the subject.
“I think it is very important not to cast any doubts on Canada’s fiscal credibility,” she said.
This from a finance minister who has never hit a fiscal target she has imposed on herself.
In 2020, her preferred fiscal anchor was linked to labour market outcomes, post pandemic; by 2022, it was declining debt-to-GDP until the ratio went up instead of down.
Last November, she said the 2023/24 year deficit would be at or below $40.1 billion; that debt-to-GDP would keep on declining; and, that within two years, deficits will be below one per cent of GDP (they have averaged 1.4 per cent over the past six years and reaching the new target will require $50 billion in spending cuts).
In an interview with Bloomberg, she said Canada will keep her promise on the declining debt to GDP ratio but would not comment on the size of the deficit, which most economists expect to be much higher than $40 billion for 2023/24. It is entirely possible that the ratio will decline, while the deficit rises because GDP was higher than expected.
The parliamentary budget officer has already estimated a $46.8 billion deficit for 2023/24 and $46.4 billion for the current fiscal year. Finance sources suggest last year’s revised deficit will be north of $60 billion.
Whatever the final figure, it is almost certainly going to shred what’s left of Freeland’s credibility. Worse though, it will impact the soundness of Canada’s reputation.
“Straying from fiscal budget anchors negatively impacts government credibility and makes their borrowing more expensive, potentially raising lending risks for bond investors,” wrote Rachel Battaglia, an economist at RBC in a note last April. “Any rise in the federal government’s borrowing costs will trickle down to businesses and households.”
Servicing the debt now accounts for more than 10 per cent of revenues and is more than Canada spends on defence
Martin Pelletier, a senior portfolio manager at TriVest Wealth Counsel, said there is real danger markets could decide that Freeland has lost control. “Bond markets will start to push back, not unlike what has happened to our dollar,” he said.
Freeland told the committee on Monday that Canada’s fiscal position remains strong and sustainable, compared to its peers.
That’s true. As Battaglia and her colleague RBC assistant chief economist Cynthia Leach noted in a report earlier this month, there are plenty of positives about Canada’s fiscal position: a triple-A credit rating; investors continue to purchase government debt; the budget watchdog has found the finances to be sustainable; and debt-to-GDP levels are stable, despite all the new structural spending.
But they warned that “fiscal space should be carefully guarded.”
Not even Freeland could claim that the government’s GST holiday, which the budget officer warns could cost up to $2.7 billion, is prudent use of taxpayers’ money, especially if it cancels out planned interest rate cuts. The Globe and Mail has reported that relations between Freeland and the Prime Minister’s Office are “chilly” in the wake of the sales-tax break and Finance sources are clear that this was not their idea.
The blatant electoral bribe might have been excusable if the budget was balanced and the forecast was for clear, blue skies ahead.
But it was financed by borrowing and the skies are already bruising.
Leach and Battaglia noted that the economic growth engine the Liberals have relied on — high levels of immigration — will slow in the coming years, as lower targets for immigrants, temporary workers and students take effect. They estimated that it will shave a percentage point off economic growth over the next three years, negatively impacting the budgetary balance by a cumulative $50 billion over five years.
BMO Economics has suggested that the threat of the 25-per-cent tariffs by U.S. President-elect Donald Trump will require the federal government to spend a further $15 billion a year, including on defence and the border.
If tariffs do start to bite, unemployment will rise further, productivity will fall and the already weakened Canadian dollar could see a five- to 10-per-cent depreciation, the bank said.
The Liberals have spent tens of billions of dollars on national childcare, dental care, seniors’ benefits enhancements, and now on cheaper toys and Christmas trees. A national pharmacare program would add a further $18 billion or so a year.
Program spending under this government, as a share of GDP, has risen from 14.6 per cent to 17.3 per cent, much of it financed by piling more dollars on to the national debt. Servicing that debt now accounts for more than 10 per cent of revenues and, at a projected $54 billion this year, is more than Canada spends on defence.
All of this might seem remote from the affordability challenges many families are facing. But if Canada’s sovereign rating was downgraded, or investors lost their appetite for Canadian debt, it would hit mortgage rates and other borrowing costs.
One thing for sure: if anyone gets blamed for casting doubt on Canada’s fiscal credibility, the prime minister is determined it will not be him.
There are rumblings that Freeland might be shuffled out of finance to reassure markets. One name being suggested as a replacement is Sean Fraser, who was immigration minister when the government opened the floodgates to millions of temporary workers.
So maybe satire is alive and well after all.
What is clear, as Justin Trudeau proved with his previous finance minister, is that there are no true friends in politics. The sharks are circling and traces of blood have appeared in the water.
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