Prime Minister of Canada’s deal with opposition party increases deficit and raises inflation alarm

OTTAWA, March 24 (Reuters) – Canadian Prime Minister Justin Trudeau’s surprise policy deal with left-leaning New Democrats will lead to bigger deficits and threatens to undo the Liberal government’s promise to rein in runaway inflation, officials said. economists.

Trudeau on Tuesday announced a rare written “offer and confidence” deal that will see the NDP backing his minority government until 2025 in return for more social spending. Read more

Topping the list is a dental program for low-income Canadians and a national pharmacare plan, which are likely to be costly and ongoing spending initiatives, economists said. Details of both programs are expected to appear in the federal budget due next month.

With the Canadian economy already at full capacity and price pressures mounting, additional spending – even if warranted – could complicate efforts to keep inflation expectations moored, said Rebekah Young, chief executive. of Tax and Provincial Economics at Scotiabank.

“The Minister of Finance risks further undermining Ottawa’s credibility in its commitment to fight inflation,” she said.

Young expects the pact, which has been denounced by leading opposition conservatives, will result in additional government spending of C$15-20 billion ($12-16 billion) over the life of the three-year deal and potentially C$40 billion. billion in total by fiscal year 2026-2027.

Rising tax revenues from soaring inflation are likely to mask much of the new spending in the near term, she said, but the deal could add half a percentage point to structural deficits in the medium term. .

Fitch Ratings stripped Canada of one of its coveted triple-A credit ratings in June 2020. S&P Global Ratings and Moody’s Investors Service still give Canadian debt their highest ratings.

The federal government’s COVID-19 pandemic support programs have already pushed Canada’s debt-to-GDP ratio to an expected high of 48.0% in 2021-22, from 30.9% in 2018-19 . It might decline more slowly from there due to increased spending.

“It looks like it would open up the pocketbooks at the federal level,” said Pedro Antunes, chief economist at the Conference Board of Canada.

Canada, like other countries around the world, is grappling with runaway inflation, which hit a three-decade high of 5.7% in February. At the same time, businesses are scrambling to hire enough workers to meet booming demand. Read more

New federal dental and prescription drug programs would require more skilled workers, who could demand higher wages, which could then create a new wave of inflation, Antunes said.

“We can start getting into this vicious spiral that we don’t want to be in,” Antunes said.

DEFENSE SPENDING

The Liberals promised C$78 billion in stimulus over three years during last year’s election campaign. The NDP platform had priced a national pharmacare plan at C$38.5 billion over five years and C$11 billion for dental coverage.

Spending under the deal will likely be quite different.

With Canada’s economy firing on all cylinders, analysts say center-left Liberals should focus on balancing the budget rather than adding stimulus so businesses don’t worry about the possibility of a tax increase.

“The right path is to grow the economy to pay for new spending measures, not the other way around,” said Robert Asselin, senior vice-president of policy at the Business Council of Canada.

Adding to the increased spending is the response to Russia’s invasion of Ukraine, which could prompt Canada to increase defense spending.

“Our investments in our Canadian Armed Forces will continue to increase and we will have more to say about this when the time is right,” Trudeau said at a summit in Brussels on the Ukraine crisis.

Trudeau said his deal with the NDP will not affect defense spending plans.

($1 = 1.2539 Canadian dollars)

Reporting by Julie Gordon in Ottawa and Fergal Smith in Toronto Editing by Paul Simao

Our standards: The Thomson Reuters Trust Principles.