Trudeau’s Plan Risks ‘Exhausting’ Fiscal Cushion, Watchdog Says

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Prime Minister Justin Trudeau’s fiscal road map could reduce Canada’s future spending capacity by leaving debt at elevated levels for decades, according to the nation’s budget watchdog.

In a report published Wednesday, the Parliamentary Budget Officer warned that the government’s plan would see Canada’s ratio of debt-to-gross domestic product remain higher that it was before the pandemic through 2055.

“This suggests that the government has decided to effectively stabilize the federal debt ratio at a higher level, potentially exhausting its fiscal room over the medium- and long-term,” the PBO said. That will require governments in the future to consider tax increases or spending reductions to pay for new programs, it said.

Trudeau’s Plan Risks ‘Exhausting’ Fiscal Cushion, Watchdog Says

Finance Minister Chrystia Freeland’s budget forecasts debt-to-GDP will peak at 51.2%, then fall to 49.2% within about five years. Before the pandemic, it was around 31%.

The document, Canada’s first full fiscal plan in more than two years, outlines a strategy to boost the country’s growth coming out of the pandemic. But Freeland’s budget may well become a campaign platform, as Trudeau is expected to try his luck at regaining his lost parliamentary majority in an election this year.

The watchdog also warned the budget estimates “overstate the impact” of stimulus spending on growth over the next three years; C$69.2 billion ($56.4 billion) in stimulus for the 2021-22 fiscal year will boost real GDP growth by about 1% in 2022-23 and 2023-24, the PBO said.

Growth Debate

Freeland’s office defended its plan as “prudent and responsible,” and reiterated the government would continue to support the economy through a punishing third wave of Covid-19.

“Canada had the lowest net debt-to-GDP ratio in the G-7 entering this global crisis and we maintain that position today,” spokeswoman Katherine Cuplinskas said by email Wednesday, noting that S&P Global Ratings reaffirmed the nation’s AAA status after the budget.

While Freeland argues the mounting debt won’t damage Canada’s reputation as a fiscal stalwart, criticism has come from prominent quarters

Mark Carney, the former governor at both the Bank of England and the Bank of Canada, described the Liberal government’s spending plan as a “hybrid budget.” He added that it would take more than one budget to fully transition the economy to a more sustainable, and faster-growing, path.

“In my judgment, this was a hybrid budget, in that it had to conquer Covid by doing important things on the social side and to start growth. What we are seeing in some other jurisdictions is that the focus is more squarely on the growth,” Carney said last week on a podcast hosted by political consultant David Herle.

David Dodge, another former chief of the Canada’s central bank, also criticized the lack of growth-focused initiatives in the budget. He argued that only C$25 billion of the more than C$100 billion earmarked for new spending increases public and private investments. He expects the rest of the funds to increase consumption.

“My policy criticism of the budget is that it really does not focus on growth,” Dodge told the Globe and Mail newspaper last week. “To me it wouldn’t accord with something that was a reasonably prudent fiscal plan, let me put it that way.”

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