Trudeau’s Pre-Election Bet Hinges on Fast Growth, Low Inflation

Justin Trudeau’s government released a budget that promises big spending on new social programs and a return to small deficits by 2025, setting the stage for a possible election in Canada this year.

After running one of the largest shortfalls of any developed country last year, Finance Minister Chrystia Freeland outlined plans Monday for a national childcare program, the centerpiece of C$101 billion ($80.6 billion) in new policy actions over the next three years. The budget also includes extensions of pandemic-relief programs as well as more cash for pensioners, low-income workers, subsidies for businesses, help for students, and billions for health care -- more than 200 new measures in all.

The nearly C$500 billion budget is a bet that voters will support Trudeau and Freeland’s vision for the government to play a bigger role in the economy over the long run, and trust them not to wreck the nation’s fiscal sustainability. Ultimately, the plan’s success hinges on robust growth and modest inflation -- allowing for a windfall of tax revenue and low borrowing costs.

Trudeau’s Pre-Election Bet Hinges on Fast Growth, Low Inflation

“The medium-term fiscal outlook depends heavily on a strong recovery over the next year without a big back-up in borrowing costs,” Doug Porter, chief economist at Bank of Montreal, said in a report to investors. “Both underlying assumptions are key risks to the plan.”

Canada is projecting a C$155 billion deficit in the current year, about 6.4% of gross domestic product. That could shrink to 1.3% of GDP in four years, the government said in budget documents, as revenue rises from the improving economy.

The government pledged to keep reducing debt as a share of the economy over over the medium term. Net federal debt is expected to hit 51.2% of GDP in 2021 before declining to 49.2% by 2025.

“That they are able to keep the debt-to-GDP at reasonable level, it’s a pretty positive thing,” Jean-Francois Perrault, chief economist at Bank of Nova Scotia, said by phone.

Trudeau’s Pre-Election Bet Hinges on Fast Growth, Low Inflation

The budget relies on forecasts for a rapid recovery in 2021 and 2022, growth that’s strong enough to keep taxes flowing in, but not strong enough to cause a spike in inflation.

“It’s a historically large budget -- an enormous amount of spending initiative,” Kevin Page, Canada’s former parliamentary budget officer, said in an interview on BNN Bloomberg Television.

Long bonds sold off, with the yield on benchmark 30-year bonds rising to 2.06% after closing last week below 2%. That’s partly because the government plans to issue more debt at the longer end of the curve, taking advantage of low rates.

“My team and I were tracking in real time and to be frank, markets don’t like it,” said Earl Davis, head of fixed income and money markets for BMO Global Asset Management. The rise in yields is “a reflection of confidence in the government, possibly, in regards to rating and spending without having measures that increase productivity,” Davis said on BNN Bloomberg.

Historic First

Freeland’s historic budget as the first female finance chief follows the blueprint of previous Liberal fiscal plans in seeking to expand the state and make social programs more generous.

The biggest-ticket item is C$30 billion over five years to establish a national daycare system, with the goal of providing spots that cost parents C$10 a day, similar to an existing system in Quebec that’s been praised for encouraging more women to join the labor force.

“This is social infrastructure that will drive jobs and growth. This is feminist economic policy. This is smart economic policy,” Freeland said in her budget speech.

Her plan also extends emergency help for businesses affected by the pandemic. That includes subsidies for wages and rent, which will be available until late September, and a temporary program to give companies as much as C$1,129 a week to help pay for new hires.

The government added a few populist tax measures that won’t bring in a lot of revenue but will generate attention. Non-resident foreign homeowners will face a 1% tax if they own homes in Canada that are vacant. A luxury tax will be levied on airplanes and cars worth over C$100,000.

As of 2022, some digital companies will face a 3% tax on revenue from “digital services that rely on data and content contributions from Canadian users” -- a measure designed to squeeze some cash from technology giants including Facebook Inc. The government thinks it can raise C$3.4 billion over five years from the levy.

Political Traps

The budget will now face a vote in the House of Commons, where the Liberals will need the support of at least one opposition party. Failure to pass it would cause the defeat of the government, triggering an election.

Support is most likely to come from the left-leaning New Democratic Party under Jagmeet Singh, the fourth-largest party in the legislature. The NDP has long advocated for a national childcare strategy and a more generous paid sick leave policy, both of which are in the budget. But Singh criticized the fiscal plan for not raising enough money from ultra-rich to pay for the growing debt and said his party will continue fighting for more aid for families, a national pharmacare program and more paid sick leave.

“With a third wave hitting us hard, it would be irresponsible to have an election,” Singh told reporters. “We absolutely refuse to trigger an election during the pandemic.”

In catering to key voting blocs including women and seniors, Trudeau’s budget is politically tricky for his biggest rival, Erin O’Toole’s Conservatives. If they oppose the budget or criticize the deficits, the Liberals will try to cast them as the party of austerity.

The one leader that may be most keen to have a vote is Trudeau, whose management of the Covid-19 crisis has helped his Liberals open up a wide lead in polls. Since the pandemic began, Canadian voters have shown a preference for sticking with what they know, re-electing incumbent governments in four provincial elections.

©2021 Bloomberg L.P.

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