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Economists call for improved spending transparency as Trudeau again refuses to set fiscal anchor

OTTAWA — The federal government’s refusal to set a new fiscal anchor reinforces the need for greater transparency around Ottawa’s towering pandemic spending plans, several economists and budgetary experts say.

In a talk with the Canadian Chamber of Commerce on Monday, Prime Minister Justin Trudeau said it would be “premature” to set a new fiscal anchor in Ottawa’s upcoming fall economic update, due to a high level of uncertainty in both the national and global economies. The Trudeau Liberals are expected to table the update in November.

The move runs counter to what numerous economists and other experts have recommended in recent months, warning that Ottawa needs to outline its high-level spending plans as it risks sliding into a position of permanent budgetary deficits.

Fiscal anchors effectively outline targets for how much debt governments intend to assume. Ottawa had previously sought to maintain a debt-to-GDP ratio of about 30 per cent, which ballooned to 49 per cent this summer as COVID-19 spending continued to mount. Experts now say Trudeau and Finance Minister Chrystia Freeland need to re-establish a new anchor in order to sketch out their long-term budgetary plans for the country.

“There’s a cost to having effectively no fiscal plan,” said Kevin Page, head of the Institute of Fiscal Studies and Democracy and former Parliamentary Budget Officer. “And right now it’s fair to say we have no fiscal strategy.”

Page and others are sympathetic to claims by the Liberal government that the global economic outlook amid COVID-19 is so uncertain that drafting up long-term spending plans would be nearly impossible.

But they also suggest that the failure to set a new fiscal target is part of a broader hesitancy in Ottawa to provide transparent information on pandemic spending. The federal government has not provided detailed updates on cash flows of some of its biggest programs, he said, and has instead stuck with highly generalized overviews that provide no detail about funding recipients.

Taken together, Page said, the situation amounts to an increasingly hazy fiscal outlook for the country.

“This is about where the government’s rudder is,” he said. “Where is the policy strategy that guides us through the pandemic, and to the post COVID-19 recovery? We’re missing that.”

Unlike other Western democracies including New Zealand and the U.K., Canada has yet to table a full budget since the beginning of the pandemic in March, citing economic instability. A brief budget update in early summer has served as the sole official document outlining spending plans.

The monthly fiscal monitor provided by Finance Canada outlines spending, but also doesn’t break down transactions into finer details, Page said.

His comments come after the Trudeau government had faced criticism even before the pandemic about its rising fiscal spending measures, which went toward a host of programs aimed at green infrastructure, social housing and other items. Even so, Ottawa largely kept its debt-to-GDP ratio stable as economic growth before the pandemic provided more opportunity to spend.

Rebekah Young, director of provincial and fiscal economics at Scotiabank, has recommended Ottawa set an updated fiscal anchor of 65 per cent of GDP, as well as provide itself with space to move should the economy sour amid successive viral waves.

“I would argue that because of the uncertainty, in fact, they could actually instill more confidence by providing an anchor for coming years,” she said.

“It’s another way to send a signal.”

While Canada’s federal and provincial debt levels continue to soar, however, most economists are largely in agreement that Ottawa maintains plenty of fiscal capacity to continue spending. Low interest rates have kept debt charges well below levels seen in the early 1990s.

The federal deficit in 2021 is expected to surge above $350 billion, according to the government’s last budget update.

The International Monetary Fund in its recent bi-annual economic outlook estimates that Canada’s budgetary shortfall in 2020 will reach 19.9 per cent of GDP, the highest among all Western democracies (the United States will run the second-largest shortfall with 18.7 per cent). By 2021 that shortfall is expected to fall to 8.7 per cent, but still among the largest in developed economies.

Doug Porter, chief economist at Bank of Montreal, says fiscal pressures from immense pandemic spending are uncommonly high at the moment, but don’t spell immediate trouble for the public purse.

He said longer-term spending adjustments will eventually be necessary, but said the announcement by Trudeau on Monday to defer a new fiscal anchor might be the correct course of action.

“I would say it’s not unreasonable, just because there’s so much uncertainty about where things are headed in the next six months,” he said.

“One of the worst things would be for them to reset the fiscal anchor and then have to reset it again. I think that would be pretty demoralizing for everyone.”

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