OTTAWA (Reuters) - Canada’s deficit spending will be much higher than forecast in March and its debt will come down more slowly, the finance ministry said in its mid-year fiscal update, as it pledged new measures to boost housing supply.
With interest rates at a two-decade high and inflation still elevated, Prime Minister Justin Trudeau’s Liberal government is under pressure to curb spending, which the central bank warned is stoking inflation.
While analysts said the spending on housing and on green-tech subsidies would ultimately be disinflationary, they expressed concern that the government was not showing enough restraint as debt servicing costs skyrocket.
The fiscal year 2024/25 and 2025/26 deficits will be much higher than had been forecast. The deficit is seen at C$38.4 billion in 2024/25 and C$38.3 billion in 2025/26, compared with March estimates of C$35.0 billion and C$26.8 billion respectively.
The federal debt-to-GDP ratio will rise for a second consecutive year in 2024/25 before it begins declining, a year later than had been previously forecast.
The finance ministry has said it targets a declining federal debt-to-GDP ratio in the medium term as a fiscal anchor. In the Fall Economic Statement (FES), the government pledged to ensure the ratio stayed on a downward track after 2024/25.
“The government recognizes it is constrained in how much it can spend, but it’s spending up to that line all the time,” said Randall Bartlett, senior director of Canadian economics at Desjardins Group. “To me, that doesn’t speak to prudence.”
On the growth side, the government uses a median of market forecasts from September, which do not project a recession, but they do see real GDP growth next year at just 0.4%, much lower than the March budget projection of 1.5%.
The Bank of Canada hiked rates to a 22-year high of 5.00% between March of last year and July of this year. It has since held them steady, but warned that they could go higher if inflation - at 3.1% in October - does not come down to its 2% target.