Investors, rating agencies see Liberal deficit plan as manageable

Share

Investors and rating agencies are largely shrugging off Ottawa's plans to run a $29.4-billion deficit, undercutting critics who warn the new Liberal government is saddling future generations with sky-high debt.

The cost of long-term Government of Canada bonds has fallen since Finance Minister Bill Morneau released his March 22 budget and rating agencies have generally agreed with the government's view that deficits are manageable provided Ottawa ensures the debt doesn't increase as a share of the economy.

Mr. Morneau was promoting the federal budget Wednesday to international investors in New York, where he argued Canada has the fiscal room to spur economic growth through short-term deficits.

Some economists and pundits have expressed concern that the budget did not produce a clear timeline for returning to surplus. Among them, University of Calgary economist Jack Mintz has warned the budget sets the stage for a looming "debt bomb." The long-term impact of Ottawa's deficit plans is now a matter of hot debate in Canadian policy circles.

The Liberals campaigned on a package of tax cuts and infrastructure spending they said could be paid for with a cumulative deficit of $26.1-billion over four years. However, after several months of lowered forecasts for economic growth, the first Liberal budget under Prime Minister Justin Trudeau forecast five years of deficits totalling $113-billion.

The Official Opposition Conservatives have labelled the Liberal plan a "nightmare scenario" for taxpayers.

But Moody's Investors Service vice-president Steven Hess, who analyzed the federal budget, said the deficit is "not large" as a share of the economy and the federal debt-to-GDP ratio of 31.2 per cent is low by international standards after two decades of decline.

"Some very slight increase in that ratio would not be a concern from a rating perspective and in fact, if you look at the government projections in the budget document, that ratio actually falls over the next four years," he said in an interview. "And so by any international comparison standard, it's not a large deficit and it's going to be falling and the debt ratios will improve – if you take their forecasts at face value – and basically we think they are reasonable forecasts."

Mr. Hess said the overall impact of the budget is neutral from a rating perspective and could be viewed as "marginally positive" to Canada's credit rating if the spending is well-targeted and results in somewhat higher economic growth.

That analysis fits with recent market reaction. David Madani of Capital Economics noted Wednesday that long-term bond yields have fallen since the budget. The economist said in a note that the market's "shrug" is hardly a surprise because the risk that the budget's projected deficits would trigger a surge in Ottawa's borrowing costs "is practically zero."

The three main credit rating agencies – Moody's, Standard & Poor's and Fitch – all currently give Canada the highest triple-A rating, though none has released official rating announcements since the budget.

Fitch's post-budget commentary said the deficits were not a surprise and complement the Bank of Canada's monetary policy. However, the agency did express a note of concern that the added debt will limit Canada's options in the event of an economic shock. Standard & Poor's has not yet released an analysis of the budget.

Mr. Morneau said in New York that his message to foreign investors is that Canada has the room to deliver on its promises.

"For investors, we know that they want to see an economy that's going to grow at a healthy pace over the long term and that's exactly what we're setting out to do," he told Bloomberg TV at its New York studio. Mr. Morneau was asked what would happen if the rating agencies disagreed with his pro-growth agenda.

"I think they're going to agree because what we've said we're going to do is be prudent along the way," Mr. Morneau said. "I'm confident that investors, investors in Canadian bonds, are going to be supportive because we're going to enhance the long-term trajectory of our country."