Canadians worried about federal deficits should look at the country’s strong standing with international credit-rating agencies for some reassurance, Prime Minister Justin Trudeau says.
In a wide-ranging interview, Trudeau said Canada’s triple-A rating with agencies like Moody’s Investors Service and Standard & Poor’s should provide comfort to taxpayers who fear his government has been accumulating too much debt.
Trudeau insisted Canada’s high rating scores mean experts have confidence in his government’s approach to the economy.
He made his argument as critics, and especially the Conservatives, warn Ottawa should be curbing deficit-spending in the stronger-than-expected economy.
Debate over the state of Canada’s books could turn into a key ballot-box issue ahead of next October’s federal election – and it could become particularly interesting if the Liberals are forced to navigate a downturn between now and then.
“This question around deficits, obviously, has been one that has led to a lot of conversations, a lot of attacks or critiques from our political opponents, the legitimate questions from journalists and, quite frankly, worries from Canadians,” Trudeau said in an interview last Friday with The Canadian Press.
“Who are the experts in terms of sustainability of a fiscal plan? I’d suggest that the international bond ratings agencies – S&P, Moody’s and those folks know what they’re talking about … The fact that the international ratings agencies are giving us a thumbs up right now should reassure people.”
Asked about the next downturn or recession, Trudeau argued his government’s moves to boost immigration and to make investments in areas like skills training, infrastructure and a lower-carbon economy have made Canada more resilient against future shocks.
He also said his government’s child-benefit enhancements and income-tax reductions for middle earners have also improved the resilience of Canadian households.
The Trudeau Liberals were elected in 2015 on a pledge to run modest annual shortfalls of no more than $10-billion and to balance the books by 2019. Instead, they’ve posted yearly deficits almost double that size and no longer have a timetable to return to balance.
After taking office, the Trudeau government shifted its focus to keeping the government’s debt burden – as measured by Ottawa’s net debt-to-GDP ratio – on a slight downward track.
Experts, however, have cautioned that the debt-to-GDP ratio will be thrown off course in a downturn, leaving Ottawa to search for another so-called “fiscal anchor” to keep spending in check.
Trudeau said the debt-to-GDP is a “benchmark we’re going to stick to.”
He was also asked if the public should expect the next Liberal election platform to focus on debt-to-GDP rather than another promise to balance the books.
“We’re certainly going to be making decisions about how to demonstrate our fiscal responsibility and nothing has been finally decided yet, but I think the debt as a share of GDP is a very handy and important way of measuring how sustainable a fiscal plan is,” he said.
Conservative MP Pierre Poilievre said Trudeau’s comments raise doubts about the Liberals’ debt-to-GDP anchor.
“He is shifting the goalposts … He called the debt-to-GDP ratio a ‘handy’ tool – he didn’t say it was the anchor to which he remains committed,” Poilievre said Monday.
“Now he’s making a new promise, which is I’ll try not to get our finances downgraded by the ratings agencies.”
Poilievre also argued there’s no evidence to support Liberal assertions that deficit spending has helped boost Canada’s growth. He credited the improvements to big external factors like the booming American and global economies, rock-bottom interest rates and housing bubbles in Vancouver and Toronto.
Canada is now ill-prepared for economic trouble, he insisted.
“He’s squandered everything we had in the name of sunny ways and now we’re not ready for the stormy days,” Poilievre said.
Doug Porter, the Bank of Montreal’s chief economist, cautioned about paying too much attention to credit agencies because their long-term focus means ratings often lag developments. They usually make changes only after there’s been a problem for a while and “things have deteriorated fairly extensively,” he said.
“If you’re going to hang your fiscal hat on the credit ratings, then the story can change pretty abruptly if the credit-ratings agencies have a rethink,” Porter said.
Porter said he’s a “bit concerned” Ottawa’s deficit outlook hasn’t improved more, given the health of the economy. The federal government, he added, will need fiscal room to cushion the blow from the next downturn.
Canada has had a triple-A credit rating with Moody’s since 2002 – a time period that has spanned both Liberal and Conservative governments in Ottawa.
A report last month by the agency said the rating was due, in part, to “stable” debt ratios for all levels of government, which were supported by a low federal debt burden that’s expected to gradually decrease over the next few years.
Ottawa projects the federal debt-to-GDP ratio to gradually fall from 30.9 per cent in 2018-19 to 28.5 per cent in 2023-24.
The government is predicting annual deficits of $18.1-billion in 2018-19, $19.6-billion in 2019-20 and $18.1-billion in 2020-21.
Last week, Moody’s announced a downgrade to the Ontario government’s rating to Aa3 from Aa2. It cited the province’s $14.5-billion deficit projection for 2018-19 and an outlook of more shortfalls in the coming years.