Canada has firepower to invest billions in green transition, analysts say

[February 24, 2023]  By Steve Scherer

OTTAWA (Reuters) - Canada has the firepower to invest billions of dollars in the green transition over the coming years to make it more competitive with the United States, analysts said, while also ensuring its public finances stay on a sustainable path.

Prime Minister Justin Trudeau has fiscal room in this year's budget because tax revenue has held up, COVID-19 pandemic supports have ended and the economy is performing better than previously expected, said Randall Bartlett, senior director of Canadian economics at Desjardins.

"When I look at the long-term trend in the debt-to-GDP ratio, it's trending down," Bartlett said. Because nominal growth is forecast to be weak in the 2023/24 fiscal year, the ratio might creep up before heading downward again. Bartlett called it "just a blip on the path."

Finance Minister Chrystia Freeland has targeted a declining net debt-to-gross domestic product (GDP) ratio each year to assure financial markets that the government has spending under control.

Freeland, who is due to present the budget in March or April, has said she will take a "fiscally prudent" approach that will not hamper the central bank's fight against inflation, which was almost three times its 2% target in January.
 

But she has also promised investments in response to the U.S. Inflation Reduction Act (IRA), which contains $369 billion in incentives for consumers and businesses to make the low-carbon transition there. She said these investments will encourage people to build the clean economy in Canada.

Many in industry say Canada must do more to be a key player in the green transition as the IRA is already spurring investment in the United States. But borrowing costs are rising and the economy could tip into recession this year, reducing tax revenues, so caution is warranted.

"At this point in the economic cycle, you're better off saving if the spending isn't needed," said Rebekah Young, head of resilience economics at Scotiabank.

In the fall, Freeland forecast a gradually declining deficit and a balanced budget by 2027/28.

William Foster, vice president and senior credit officer at Moody's Investors Service, said Canada has committed to getting deficits "back on track" after the massive pandemic spending. Moody's has a 'Aaa' rating - the highest - on Canada's sovereign bonds, with a stable outlook.

Canada's Deputy Prime Minister and Minister of Finance Chrystia Freeland, with Prime Minister Justin Trudeau, takes part in a news conference after touring a medical training facility in Ottawa, Ontario, Canada, February 7, 2023. REUTERS/Blair Gable/File Photo

"We decided to affirm the triple A rating and maintain a stable outlook... because our expectation is the government will be will be committed to staying on a fiscally responsible track," Foster said.

HOW MUCH FISCAL ROOM IS THERE?

Bartlett estimates Canada could spend an additional C$20 billion ($14.9 billion) per year and keep the net debt-to-GDP ratio below 2021/22's 45.5%, which was the lowest in the G7.

Promised investments in the green transition will not "be overly inflationary" and they would provide certainty for investors and businesses, Bartlett said.

Young at Scotiabank said she expects debt-to-GDP to stay level with an additional "very ballpark" C$15 billion in expenditure.

"They'll build themselves a buffer," Young said, because future economic shocks could undermine growth and therefore make it more difficult to lower the ratio.

If that buffer were half of Bartlett and Young's estimates, it would allow an additional C$7.5 billion to C$10 billion in annual expenditure.

Freeland's office declined to comment on its potential spending in the budget.

These estimates take into account the C$46.2 billion ($34.64 billion) in new healthcare spending over the next decade announced earlier this month.

Canada has only one chance to attract investment in the electric vehicle supply chain, said Flavio Volpe, president of the Automotive Parts Manufacturers’ Association.

"Every single automaker in North America, and there's about 15 of them of consequence, has to electrify" by the 2030s, he said. "All of them will need to buy batteries at scale from facilities that don't exist currently."

($1 = 1.3427 Canadian dollars)

(Reporting by Steve Scherer; Editing by Josie Kao)

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