"However, as revenue growth slows, fresh items on the policy menu would not only threaten that progress, but could give a push to inflation in what is for now a fully-employed economy." ($1 = 1.3569 Canadian dollars) (Reporting by Fergal Smith; Editing by Denny Thomas and Jonathan Oatis)
By Fergal Smith and Molly Cone
TORONTO, March 29 (Reuters) - Canadian Finance Minister
Chrystia Freeland's promise of a fiscally prudent budget in the
face of high inflation has disappointed some strategists who had
hoped for spending restraint from the Liberal government.
Increased spending in the budget leaves the government with
less in reserve to deal with a possible economic downturn and it
could forestall a shift to interest rate cuts by the Bank of
Canada, analysts said.
The worry is that the deficit, estimated at C$43 billion
($31.7 billion) in 2022-23, or 1.5% of GDP, is wider than it
should be at this point of the economic cycle, with the economy
running hot, unemployment at a near record low and inflation
elevated, analysts said.
"A lot of folks would have liked to have seen a little bit
more fiscal restraint ... just to reserve spending power in case
we do go into a deeper recession than people are predicting,"
said Francis Fong, senior economist in charge of ESG research at
TD Economics.
Freeland repeatedly promised in recent weeks that the budget
would not make the Bank of Canada's job harder to fight
inflation, but the government projected C$43 billion of net new
spending, while the six-year forecasting horizon no longer shows
a return to balance.
Earlier this month, the central bank paused its tightening
campaign after eight consecutive rate hikes to tackle price
pressures. Money markets are betting it will shift to cutting
interest rates over the coming months after recent stress in the
global banking sector raised prospects for a credit crunch. "It probably puts a little bit of impetus on the Bank of
Canada to think about not cutting rates if they were thinking
about cutting rates towards the end of 2023," said Jules
Bordeaux, a senior economist at Mackenzie Investments.
Initiatives aimed at accelerating the transition to a
low-carbon economy were welcomed by economists.
Still, green investment should have been anticipated and
planned for, while program expenses as a share of GDP, estimated
at 15.9% in 2023-24, remain far above the pre-pandemic level of
14.6%, Cynthia Leach and Josh Nye, economists at RBC, said in a
note.
"(The budget) delivers mostly against expectation in the
sense that it delivers yet another fiscally expensive budget,"
said Rebekah Young, head of inclusion and resilience economics
at Scotiabank.
"Some big ticket items in there, most of which were
expected, but then a little bit of a slippery slope with more
added on."
The budget projects that economic growth will slow to 0.3%
this year from 3.4% in 2022.
"A windfall tied to full employment and healthy nominal GDP
growth allowed Ottawa to continue to climb down from huge
deficits in the past year," Avery Shenfeld, chief economist at
CIBC Capital Markets, said in a note.
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