LDN - Business

Trudeau should curb spending to make way for rate cuts, economists say

[March 05, 2024] By Promit Mukherjee

OTTAWA (Reuters) - Canadian Prime Minister Justin Trudeau should rein in spending in his upcoming budget if he wants interest rates to come down quickly and alleviate the cost-of-living pressures slamming his polling numbers, economists said.

"If (the government) did hold back its spending... that would help to provide more of a disinflationary impulse to the Canadian economy," Randall Bartlett, senior director of Canadian Economics with Desjardins Group.

The government had expected direct program expenses to fall by 8% this year, but instead they have jumped by 6%, Bartlett said, adding that further increases in spending in the budget would mean "the (central) bank can't start cutting rates as early or as quickly as Canadians would prefer".

Trudeau has expanded support of public health programs and social services over the past eight years. During the pandemic, spending expanded further and in 2020 Canada posted its biggest deficit since World War Two.

Economists and analysts said time was running out for Trudeau to get his fiscal house in order. A delay would not only damage his credibility at a time when his poll numbers were abysmal but also could force the central bank to keep rates higher for longer.

This year's budget will be presented to parliament on April 16, the Finance Ministry said on Monday.

The Bank of Canada (BoC) has kept its key overnight rate at 5% in its last four meetings as housing costs, food prices and wages continue to stoke underlying inflation. The bank is again expected to keep rates on hold at its next rate announcement on Wednesday.

The Liberals' spending habits have put it at odds with the central bank. BoC governor Tiff Macklem has repeatedly warned that the level of spending by the federal, provincial and municipal governments is not helping ease inflation and could slow rate cuts.

Finance Minister Chrystia Freeland last month told lawmakers that the government's budget would create conditions for rates to come down and that the fiscal targets set last fall would be met.

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Canada’s Prime Minister Justin Trudeau speaks at Red River College Polytechnic in Winnipeg, Manitoba, Canada February 15, 2024. REUTERS/Shannon VanRaes/File Photo

But she is also promising measures to get more homes built amid a housing crunch and to make life more affordable for Canadians.

Spending on salaries of government employees, grants, subsidies and capital expenditure - direct program expenses - has risen to about 10% of the GDP currently from 5% in 2015. In the first nine months of the year, these expenses have already surpassed last year's number by a third.

The federal deficit swelled by more than four times versus a year earlier to C$23.6 billion during the first nine months of the fiscal year, official data show.

Freeland proposed new fiscal anchors in November's Fall Economic Statement capping the deficit at C$40.1 billion - or about 1.4% of GDP - in the current fiscal year.

The government is expected to overshoot this deficit by around C$20 billion, which will further push up debt servicing costs, said Robert Asselin, vice president of trade international policy at Business Council of Canada, adding the government would miss its fiscal goals by a big margin.

"If you want to get out of a hole, first stop digging it deeper," said John Manley, a former Liberal politician who served as Canada's finance minister between 2002 and 2003, on the government's spending binge.

"I think they need to be held to account for what they're committing future governments to spend."

($1 = 1.3578 Canadian dollars)

(Reporting by Promit Mukherjee, editing by Steve Scherer and Aurora Ellis)

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