The Business Council of Canada is urging Finance Minister Chrystia Freeland to avoid new spending in the fall economic update and to set a clear fiscal anchor focused on managing the growing cost of servicing debt.
Council president and chief executive officer Goldy Hyder sent a letter this week to Ms. Freeland, who is also Deputy Prime Minister, addressing the business community’s priorities ahead of the minister’s next update.
He pointed out that the yield on the 10-year Government of Canada bond is now hovering around 4 per cent, up from 2.8 per cent six months ago, meaning the cost of servicing federal deficits and debt has risen substantially.
“With long-term interest rates at the highest they have been in years, it is irresponsible to suggest that economic growth will be higher than interest rates for years to come. Governments can no longer run permanent large deficits without fear. The era of low interest is no longer with us, and that is a reality the government must address,” Mr. Hyder wrote.
The date for the fall economic and fiscal update has not yet been announced, but it is typically released in November. Ms. Freeland is scheduled to meet with private-sector economists later this week to hear their suggestions.
The Finance Department has long relied on an average forecast of key metrics such as GDP growth and inflation from private-sector economists as the foundation of its budget and fiscal update forecasts.
Mr. Hyder said that in light of higher borrowing costs, the fiscal update should avoid announcing permanent new spending funded through deficits. The government has indicated it is looking at options for new spending on housing and national pharmacare. The NDP has said that action on pharmacare is a “red line” in its working agreement with the Liberals to keep the minority government in power.
“As valuable and important as the contemplated measures may be, funding them with borrowed money is ill-advised and will only exacerbate the precarity of our public finances,” wrote Mr. Hyder, who will expand on these issues Wednesday in a lunch-hour speech to the the Canadian Club Toronto.
The business council’s letter says the government should introduce a new fiscal anchor in which it would ensure debt servicing costs do not exceed a maximum of 10 per cent of revenue, a metric known as the debt service ratio. A fiscal anchor is a target that guides the government’s overall spending plan.
Ms. Freeland’s current fiscal anchor is to keep the debt-to-GDP ratio on a declining trend. However Parliamentary Budget Officer Yves Giroux has expressed concern that the government has allowed short-term deviations in that trend.
The PBO report released a report last week that said the debt-to-GDP ratio will rise to 42.6 per cent in the current 2023-24 fiscal year, from 42 per cent last year. It also said the debt service ratio will peak at 12 per cent in 2023-24 and then decline gradually to 11 per cent in 2028-29.
The PBO said the federal deficit is on pace to exceed $46-billion this fiscal year, which is $6-billion more than projected in Ms. Freeland’s March budget.
The direction of Ottawa’s fiscal policy was the focus of a day-long debate Tuesday on the floor of the House of Commons.
Conservative Leader Pierre Poilievre used a designated opposition day to trigger a debate on federal fiscal policy, with a motion calling on the government “to introduce a fiscal plan that includes a pathway back to balanced budgets, in order to decrease inflation and interest rates.” The motion also calls for the plan to be introduced before the Bank of Canada’s next interest rate decision on Oct. 25.
“The reality is that when we spend what we do not have, we drive up the cost for everyone else,” said Mr. Poilievre in his opening speech, which referenced the recent PBO report findings. “One would think the government would reverse its policies, but it is doing the opposite.”
Statistics Canada announced Tuesday that Canada’s inflation rate dipped to 3.8 per cent in September, down from 4 per cent in August. Economists were expecting the rate to remain at 4 per cent. The rate is still above the Bank of Canada’s 2-per-cent target.
Liberal MPs who spoke during the debate highlighted the fact that inflation is coming down and pointed to various recent government announcements aimed at addressing cost-of-living concerns.
At a news conference Tuesday to announce additional consumer measures, Ms. Freeland said Canada’s fiscal record compares favourably to those of its international peers.
“We recognize that fiscal responsibility is important for Canadians. I think, culturally, it’s something we care about maybe more than people in other countries,” she said.
The Bloc Québécois criticized the Conservative motion and its tight timeline, saying it is not credible that inflation can be addressed within the next few days.
NDP finance critic Daniel Blaikie said that while aiming for a balanced budget “is not a bad thing,” the Conservative motion is not serious.
“Canadians are experiencing pain, but to pretend that somehow deficits derived from payments so that kids can get their teeth fixed is causing inflation in the housing market is either stupid or dishonest,” he said.