By Promit Mukherjee
OTTAWA, Nov 5 (Reuters) – Economists are urging Canadian Prime Minister Mark Carney’s government to restrain spending in its second budget on Thursday, saying that despite windfall oil revenue, spending commitments could lead to bigger deficits in the coming years.
Carney, who has run two central banks, needs to show how he will attract investment and ease affordability concerns, but also demonstrate fiscal credibility to preserve the country’s AAA credit ratings and keep borrowing costs low, economists say.
Carney’s government is due to present its budget in parliament around 4 p.m. ET (2100 GMT).
Almost 20 months of tariffs on some Canadian goods from the United States, Canada’s largest trade partner by far, have upended supply chains and shrunk exports to the US. The Iran war is pushing up gasoline and diesel prices, and policymakers say they could spill into food costs soon, while higher interest rates are increasing mortgage costs.
The economy has nonetheless held up relatively well, Canada’s official GDP figures show, helped by data center construction, higher oil revenue in the world’s No. 4 producer and government supports such as a suspension of federal fuel taxes.
“Affordability is top of mind,” Finance Minister Francois-Philippe Champagne told reporters in Montreal on Wednesday.
“We need to invest in our future and growth, supporting small and medium-sized businesses,” he said.
BUSINESS TAX MEASURES
Champagne told a business audience on Monday the budget would include tax measures for small and medium-sized businesses, declining to share specifics.
But economists say the government must show spending restraint and explain how it will pay for its defense and infrastructure pledges without raising debt and deficit levels.
Last year, Carney pledged to raise defense spending to 4% of GDP by 2030, including core spending of 2.5% and ancillary spending of 1.5%, and to 5% by 2035, to meet NATO commitments. Canada currently spends 2% of GDP on defense.
In last year’s budget announcement, Carney said Canada would attract C$500 billion to C$1 trillion ($358 billion to $716 billion) in investments over the next five years through tax incentives and major infrastructure projects.
Pedro Antunes, chief economist at Signal 49 Research, an independent firm, said he was unsure Canada could meet its defense spending goals.
“If we are going to get there, then we need to see (in the budget) where and how that money is going to be spent,” he said.
A detailed defense fiscal plan would lend credibility to Canada’s ambitions, Scotiabank said in its federal budget outlook.
Champagne set two fiscal goals last year — for the government to balance day-to-day operating spending against revenue by fiscal year 2028-29 and to maintain a declining deficit-to-GDP ratio.
Carney said in September that operating spending would balance against revenue a year earlier than targeted, but economists said a falling deficit-to-GDP ratio would be hard to sustain.
Antunes said Champagne should stick to last year’s fiscal goals. “I think credibility around this has been worn thin,” he said.
New spending and tax measures since April’s economic update total nearly C$140 billion over the next decade, and the fiscal outlook points to substantially larger deficits, said Randall Bartlett, deputy chief economist at Desjardins.
($1 = 1.3972 Canadian dollars)
(Reporting by Promit Mukherjee;Editing by Rod Nickel)
