Top bankers warn Ottawa of Canada’s growing debt

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Canada’s biggest lenders are warning Prime Minister Justin Trudeau’s government that it does not have carte blanche to run massive budget deficits, even if there is room for additional spending over the next two years.

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Finance Minister Chrystia Freeland held a call Thursday with the chief executives of the country’s largest banks to discuss the economic outlook and potential policy measures. He was told that while low interest rates provide some leeway to borrow more in the coming years to support the recovery, it is imperative that the government recommit to specific new debt targets. to impose discipline on the budget process, according to a person familiar with the discussion.

Freeland, who became finance minister last month after the resignation of Bill Morneau, has also been urged to devote new spending to productivity-enhancing measures, such as childcare. Freeland department officials got a similar message in recent consultations with banking economists, who agree that new spending should be focused on boosting productivity, rather than simply stimulating consumer demand.

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“There’s no hard line in the sand as to how high the government’s debt-to-GDP ratio can go, but the sky’s not the limit,” economist Royce Mendes said over the phone. the Canadian Imperial Bank of Commerce. “Governments should not unnecessarily test the limits.”

After appointing Freeland to the finance post, Trudeau signaled that he plans to maintain historically high deficits for years, promising ambitious new spending to spur the recovery and plug gaps in social safety nets exposed by the virus. The Prime Minister is expected to unveil the elements of the plan during a parliamentary speech on September 23.

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That would be on top of the $380 billion in new debt already budgeted for this year in response to the economic downturn, spending that will likely push federal government debt to about 50% of economic output, from 31% last year.

The debt ratio could climb as high as 65% without jeopardizing Canada’s status as one of the least indebted governments in the Group of Seven, Bank of Nova Scotia Jean-Francois Perrault economists said Monday. and Rebekah Young in a report. This would give the federal government the potential to run deficits of another half a trillion dollars over the next three years.

But that should be accompanied by a firm commitment to gradually reduce the debt burden to ease concerns about the country’s fiscal trajectory, they said, possibly by introducing legislation requiring the government to reduce its debt ratio. indebtedness. Spending should seek to address women’s low participation in the labor market and low investment and productivity.

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The current fiscal policy pivot presents a unique opportunity to make bolder investments to “address some of the very big structural impediments to mediocre growth potential in Canada, such as chronic productivity deficits,” Young said. director of tax economics at Scotiabank, said by telephone.

Perrault and Young recommended new funding to help families pay for childcare, which would boost women’s labor force participation, increase disposable income and increase housing affordability. They also suggested temporary matching grants of around 25% for companies investing in machinery, equipment and intellectual property.

“As Canada’s fiscal policy shifts this fall, composition arguably matters as much, if not more, than quantum alone,” Young said.

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The focus on growth-enhancing spending measures is important as the economy is expected to rebound over the next two years, weakening the case for additional emergency stimulus.

“Frankly, I’m a bit concerned about some of the messages we’ve heard from Ottawa in recent weeks about using this ‘golden opportunity’ to launch all kinds of new spending,” said Doug Porter, chief economist. at the Bank of Montreal. by telephone. “We have already made quite a big recovery in the last three or four months. We should be well past peak spending.

Another general point of agreement is the need to re-establish a fiscal anchor, mainly because the demand for Canadian government debt – which is currently keeping interest rates low – is not unlimited.

Soaring public debt also makes Canada more vulnerable to future shocks, especially as the country bears one of the highest household debt burdens in the world.

Some believe public debt is already close to what should be peak levels.

I’d love to hear “broad indications that they want the debt-to-GDP ratio down,” Craig Wright, chief economist at Royal Bank of Canada, said by phone. “And I would like to hear discussions, many years from now, that they would like to eventually find balance.”

Bloomberg.com