Canada's Fiscal Challenges Ahead

By Promit Mukherjee
OTTAWA (Reuters) – Canada's fiscal targets are becoming increasingly difficult to meet due to a promised holiday payout by Prime Minister Justin Trudeau and declining growth from immigration restrictions.

Alongside pressures such as a pledge to increase defense spending, potential U.S. export tariffs, and election-year spending temptations, Canada's deficit and debt forecasts are concerning, according to economists and academics.

Canadian voters prioritize affordability of housing and groceries over fiscal deficit and government debt, impacting Trudeau's approval ratings ahead of an upcoming election.

On November 21, Trudeau promised a C$250 ($178.81) cheque for nearly 90% of working Canadians and a sales tax freeze on essential goods from December 14 to February 15. Mahmood Nanji, Policy Fellow at Ivey Business School, labeled the measures as “good politics and bad policy.”

Concerns remain over funding for these initiatives, as public spending surged during the COVID-19 pandemic, widening the gap between government revenues and expenditures to its highest level since WWII.

Finance Minister Chrystia Freeland has postponed debt reduction goals twice in 2023 but aims for a deficit at or below C$40.1 billion for 2023-24. She plans to maintain the deficit-to-GDP ratio below 1% by 2026-27. However, early estimates suggest the annual fiscal deficit target is being missed, as total government spending has already risen above annual targets.

The Canadian economy is expanding, albeit slower than anticipated, and immigration cuts may further hinder growth, jeopardizing debt and deficit figures. Trudeau's measures to limit immigration could result in a slight population decline, impacting GDP and revenue projections significantly.

Despite risks, Canada holds AAA ratings from two agencies. Still, increases in defense spending to 2% by 2032 and potential U.S. tariffs loom large over the economy.

Economists caution that upcoming election pressures might tempt the government to overlook fiscal targets, as the operating budget could potentially accommodate necessary adjustments.

($1 = 1.3981 Canadian dollars)