Canada's finance minister unlikely to pile on government spending in next federal budget: Don Pittis

A burst of federal spending just as the U.S. boosts its own economy could add pressure for faster Canadian interest rate hikes.

New fiscal spending just not needed to juice an economy charged up by U.S. spending and tax cuts

Some analysts predict federal Finance Minister Bill Morneau may show restraint while announcing the next federal budget. (Chris Young/The Canadian Press)

There is never any shortage of people asking for new money in a federal budget.

From Indigenous housing to cyber-security to conservation there are always worthy, and popular, ways to spend money. And if Ottawa were ever at a loss, provincial governments are full of helpful suggestions for new federal spending.

Despite the seemingly insatiable urge of governments to chalk up debt, there are some good reasons why finance minister Bill Morneau may show some restraint this time around.

A series of economic statistics, including last week's retail sales figures and January jobs, are further indications that Canadian economic growth is declining from last year's highs.

Following Trump's lead

There is an argument that as central banks move to stop fanning the fire with rock bottom interest rates, the Feds should step in with higher fiscal spending.

That's the path the U.S. government has followed, cutting taxes while continuing to spend, effectively borrowing from the future to charge up the economy now.

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Many Canadian voices have hinted that Canada should follow suit, at least in the area of tax cuts. They say Canadian businesses will be at a disadvantage compared to their U.S. competitors.

Others, including the University of Calgary's Jack Mintz, have warned that lower U.S. tax rates will encourage Canadian businesses to relocate or expand in the United States.

But according to economists at the Bank of America, the stimulative effects of U.S. budget moves will not stop at the border.

In a report titled Sugar rush from U.S. fiscal candy, BofA Merrill Lynch Global Research predicts that U.S. cuts and spending will have a direct impact on the Canadian economy.

It says higher U.S. growth, a direct result of a "U.S. budget deficit of almost one per cent of GDP in 2018," will push Canadian growth up to 2.5 per cent this year and unemployment down, forcing the Bank of Canada into more rate increases. 

Monetary or fiscal

"We now expect the Bank of Canada to hike four times this year to bring the overnight rate target to two per cent by year-end 2018," says the report. 

The prediction is a bit of an outlier. But if the Bank of America analysts are right, following the January hike, over-borrowed Canadians could expect their mortgage rates to rise by another three quarters of a percentage point this year alone.

And one of the problems of adding to federal debt at a time of rising interest rates is that the debt becomes more of a burden, according to warnings last week from the OECD in its latest report on borrowing by the world's richest countries.
Earlier this month, U.S. President Donald Trump announced new spending that combined with tax cuts will stimulate the country's economy by about one per cent of GDP, economists say. (Kevin Lamarque/Reuters)

According to the Paris-based think-tank, "sovereign debt figures remain at historically high levels while elevated debt service ratios pose a significant challenge against a backdrop of continued fiscal expansion in most OECD countries."

That can cause a vicious circle where more fiscal expansion leads to higher debt, contributing to even higher interest rates.

And there are signs inflation is creeping up. Friday's consumer price index demonstrated overall price increases slowed in January. But a glance at Statistics Canada's three measures of core inflation, indicators that remove volatile items, show a steadily rising trend.  

The Bank of Canada has said it may begin to work more closely with Finance to coordinate monetary and fiscal policy. But according to the Conference Board of Canada's Craig Alexander, who wrote in the Report on Business last week, any coordination must not conflict with the bank's independence in raising rates.

Oil on flames

So long as that independence is maintained, any fiscal spending that stimulates the economy will be at least partly counteracted by the Bank of Canada's higher interest rates.

As Bank of Canada Governor Stephen Poloz has repeatedly said, even at current levels, Canadian interest rates are low enough that they are still stimulating the economy. And according to everyone's outlook, the Canadian economy continues to grow this year.

So long as Bank of Canada Governor Stephen Poloz retains his independence from Bill Morneau's finance department, excess fiscal spending should lead to quicker interest rate increases. (Fred Chartrand/The Canadian Press)

When markets plunged earlier this month,  we saw how quickly the mood can change. As C.D.Howe policy analysts said in their Friday shadow budget, there are long-term challenges ahead for Canada, including an inevitable economic slowdown and an aging population.

But for now, while spending may make the Liberal government more popular, the economy really doesn't need fiscal stimulus.  

In a strategy we've seen before, Morneau may announce spending plans for the coming years. He can certainly decide to change the government's spending priorities. But pouring on new spending in this fiscal year may only serve to overheat an economy that really doesn't need to be any hotter.

Perhaps the finance minister will decide it's best to wait a year and see how things look then. After all that will be the budget just before the 2019 federal election.

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Don Pittis

Business columnist

Based in Toronto, Don Pittis is a business columnist and senior producer for CBC News. Previously, he was a forest firefighter, and a ranger in Canada's High Arctic islands. After moving into journalism, he was principal business reporter for Radio Television Hong Kong before the handover to China. He has produced and reported for the CBC in Saskatchewan and Toronto and the BBC in London.