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Trudeau Will Add to Record Debt With First Pandemic Budget

Kait Bolongaro and Theophilos Argitis
·6-min read

(Bloomberg) --

Justin Trudeau is set to unveil a vision for Canada’s post-pandemic recovery on Monday that will double as an election platform, heavy on new spending and assurances the mounting debt is affordable.

The budget, the prime minister’s first full fiscal plan since before Covid-19 hit, is an opportunity to lay out longer-term aspirations he’ll be able to campaign on in a national vote that could see him regain his parliamentary majority.

Trudeau’s government has signaled as much as C$100 billion ($80 billion) in additional money over the next three years for initiatives from childcare to green energy. Expectations are being set so high that an even more ambitious plan can’t be ruled out. Finance Minister Chrystia Freeland has described the budget as “among the most significant of our lifetime.”

To help business while the pandemic still rages, the government will extend wage and rent subsidies until September and implement a new program to temporarily subsidize new hiring, at C$1,100 per month for every new employee, according to a person familiar with the budget’s contents who requested anonymity before its release.

The budget will contain more than C$2 billion for childcare, the person said, and impose new taxes on digital services, which the government has previously promised.

‘Full of Firsts’

It’s landing at a tense moment. The economy is healing faster than expected, but a recent surge in virus cases is forcing Canada’s largest province, Ontario, to impose the most stringent restrictions on movement yet. Delivery delays have plagued the nationwide vaccine effort.

“Monday’s budget is full of firsts -- the first federal budget in more than two years, the first federal budget for Chrystia Freeland, and the first federal budget for a female finance minister,” said Elliot Hughes, a former adviser to Freeland’s predecessor who now works at Ottawa-based consultancy Summa Strategies.

“And if that didn’t help raise the stakes, it comes as Canada is in the midst of the third and deadliest wave of the Covid-19 pandemic,” Hughes said by email.

The documents will be released around 4 p.m. in Ottawa, when Freeland is scheduled to start giving her budget speech to Parliament.

The new spending will be on top of record levels of debt the nation is already taking on.

Canada will likely report a budget deficit of C$363 billion, or 17% of gross domestic product, in the fiscal year that ended March 31, according to the federal spending watchdog. Another C$150 billion budget gap is projected this year, according to the average forecast from a Bloomberg survey of economists.

By the time all the money is out the door, Trudeau will probably have accumulated more debt than all 22 prime ministers who preceded him combined. But he’s still betting Canadians are in the mood to think big.

Freeland, and others in government, constantly discuss vulnerabilities exposed by the pandemic. Recently, she said Covid-19 has opened up a “window of political opportunity” to tackle childcare.

The Globe and Mail newspaper reported Sunday night that funding is destined for provinces under a C$10-a-day daycare model -- part of additional spending that will hit C$100 billion. The paper, citing unnamed sources, said there will also be small business funding for e-commerce and a venture capital fund to support hard-hit sectors from the pandemic, as well as funding or tax credits for housing and renovations.

The Canadian Broadcasting Corp., citing unnamed an senior government official, said the deficit for the fiscal year that just ended would not surpass C$400 billion. The extension of the Covid-19 income supports was first reported by the Toronto Star, and the tax on digital services by Reuters, which also said the government would impose a levy on luxury items like cars worth more than C$100,000, private planes and yachts.

With Canada’s economy faring far better than anyone expected, there will be pushback against the deficit spending -- with the main opposition Conservatives warning against an “avalanche” of red ink.

Despite the pandemic’s toll, the economy is poised to fully recoup last year’s losses as early as this year. That means the government’s narrative for the additional spending will need to go beyond kickstarting the expansion. Cabinet ministers have already begun to draw comparisons between their efforts and President Joe Biden’s infrastructure plan, which aims to bolster long-term U.S. growth.

But politics may be the biggest reason ambitions are elevated. Trudeau’s Liberals kept power but lost their parliamentary majority in 2019. Polls suggest they have a strong chance to win it back, which is why an election is expected soon.

There’s a risk, however, that voters punish Trudeau if he’s seen as being reckless. Deficits matter in Canada, with a collective aversion to debt that was cemented in the mid-1990s amid rating downgrades, a falling currency and a national unity crisis.

Soaring spending forced the government to abandon its last budget rule at the start of the crisis. But Trudeau has formally instructed the finance minister to re-establish a “fiscal anchor” and avoid creating any new permanent spending.

What Bloomberg Economics Says...

“A quick return to low deficits is unlikely, in our view. However, the federal government’s favorable pre-pandemic debt profile gives it more latitude to add spending, and low interest rates, even under shock scenarios, mean the costs are likely to stay well contained.”

--Andrew Husby, economist

For the full report, click here

One benefit from the stronger-than-expected recovery is an improving picture for tax revenue. Nominal output is now on track to be about C$100 billion more this year than projected in the government’s last fiscal update in November, which means about C$15 billion more in annual revenue than forecast at the time. That windfall gives Freeland some cushion to spend.

Some are warning Canada needs to start considering new taxes to bring the budget back closer to balance. The C.D. Howe Institute, an influential think tank, is recommending Trudeau increase the national sales tax.

The prime minister has raised taxes incrementally during his five years in power. Early on, he increased the marginal income tax rate for top earners. In November, Freeland unveiled plans for new levies on global tech giants. The government has said it’s considering a tax on foreigners who buy homes in Canada but leave them empty.

Beyond that, taxation may be a non-starter, for now. Trudeau has longed pledged not to boost taxes on middle-class Canadians, choosing instead to rely on debt to finance his ambitious agenda.

(Updates with Bloomberg Economics analysis after 21st paragraph.)

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