Morneau Rejects U.S.-Scale Deficits That Would Raise Rates
Morneau Rejects U.S.-Scale Deficits That Would Raise Rates
(Bloomberg) -- Canada’s Finance Minister won’t follow Donald Trump’s big deficits in part because he doesn’t want interest rates to rise too quickly.
Bill Morneau, speaking Thursday, defended his federal budget plan by saying the on a per-capita basis, Canada’s deficits are only one-fifth of those in the U.S.
“We’re saying we need to be fiscally responsible, we need to continue to grow our economy. We don’t want to overheat our economy so our interest rates go up rapidly,” Morneau said Thursday during a panel discussion in Toronto. “We want to do it in a managed way.”
Morneau’s budget this week projected C$98 billion ($76.1 billion) in deficits over six years, relatively modest in a C$2.2 trillion economy that led the Group of Seven in growth last year but is forecast to expand at a slower pace in 2018. The government is planning to lower deficits modestly in coming years, along with the ratio of total debt to the size of the economy, though pressures for the government to do more could grow ahead of a 2019 election. The government is under pressure to implement big-ticket items such as corporate tax cuts and a national plan to cover pharmaceutical costs.
“He’s essentially saying we wouldn’t get faster growth because the results would be a greater tightening in monetary policy," said Avery Shenfeld, chief economist at the Canadian Imperial Bank of Commerce. “It’s not the stage of the business cycle where you ramp up deficits to stimulate growth when you already have the central bank concluding we are approaching full employment and try to slow growth down.”
In his comments, Morneau said his approach was prudent and singled out the U.S. approach as a contrast.
“If we were going in the opposite direction, you can see what’s happening in the United States right now -- they’ve made some tax changes that means that their deficit, compared to ours, on a per-capita basis is five-to-one. Five to one,” he said. “That’s what what they’re doing for their economy. Now, we’re not taking that approach.”
Morneau’s budget, unveiled Tuesday, estimated a sustained increase of one percentage point in interest rates would cost the federal government C$2.8 billion annually by the fifth year.
Officials within Prime Minister Justin Trudeau’s government last year were concerned the Bank of Canada was moving too quickly to raise rates, and could trigger a downtown as Canadians carry high levels of debt.
Morneau’s budget didn’t respond to widespread calls from business groups to improve Canada’s competitiveness, either by cutting corporate taxes or taking other measures. Morneau has said he’ll study the impact of U.S. tax reform, rather than take what he called Thursday a “knee-jerk” response.
Foreign direct investment into Canada plunged last year to the lowest since 2010, hampered by an exodus of capital from the nation’s oil patch and worries about the fate of the North American Free Trade Agreement, new data released Thursday showed.
To contact the reporter on this story: Josh Wingrove in Ottawa at jwingrove4@bloomberg.net.
To contact the editors responsible for this story: Theophilos Argitis at targitis@bloomberg.net, Chris Fournier
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