ADVERTISEMENT

Trudeau’s Red Ink Could Put Bank of Canada in Bind, BMO Says

Trudeau’s Red Ink Could Put Bank of Canada in a Bind, BMO Says

(Bloomberg) -- Prime Minister Justin Trudeau’s fiscal update Monday was so stained with red ink that it may increase pressure on the Bank of Canada to act in the event of a downturn, according to Doug Porter, chief economist at Bank of Montreal.

The projections from Finance Minister Bill Morneau show the nation is on track to run a C$26.6 billion ($20.2 billion) deficit this year and a C$28.1 billion gap in 2020, higher than what was outlined in the spring budget. Morneau said lower interest rates forced the government to revalue what it needs to put aside for future pension obligations -- adding about C$28 billion in government expenses over five years.

Given the higher deficits are a result of pension revaluations rather than actual stimulus, the end result may be to place more of a burden on the central bank. “If the federal government can’t offer much more on the fiscal front, the onus will fall more heavily on the bank, should the economy soften more than expected in 2020,” Porter said in a note to investors.

While the fiscal update does take into account new personal income tax cuts that come into effect in January, it doesn’t include any of the new spending measures Trudeau promised during the fall election campaign. The Liberals had pledged to cap deficits at C$27 billion next year -- a level they have already surpassed.

They also pledged to remain fiscally prudent by keeping keeping debt as a share of the economy on a declining path, limiting how high deficits could go.

While Trudeau “campaigned on a bunch of new spending commitments, they only introduced one of them and the fiscal numbers they lay out today suggest there isn’t really room to do much more,” Rebekah Young, an economist at Scotiabank in Toronto, said in a phone interview.

--With assistance from Shelly Hagan.

To contact the reporter on this story: Theophilos Argitis in Ottawa at targitis@bloomberg.net

To contact the editors responsible for this story: Theophilos Argitis at targitis@bloomberg.net, Stephen Wicary, Chris Fournier

©2019 Bloomberg L.P.