Canada rolls out post-pandemic spending plan ahead of likely election

Canadian Prime Minister Justin Trudeau's government on Monday lined up billions in new spending to provide emergency support during a virulent third wave of COVID-19 and to help launch an economic recovery ahead of an election expected later this year.

The budget, the Liberal government's first in two years because of the pandemic, is aimed squarely at boosting near-term growth and includes a long-promised national daycare plan.

It also follows through on stimulus promised late last year, outlining a C$101.4 billion ($81 billion) "growth plan" over three years, with nearly half of that spending coming in the first year.

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"We have to finish the fight against COVID - and that costs a lot of money," Finance Minister Chrystia Freeland told reporters, adding that hundreds of thousands of Canadians remain out of work because of the pandemic.

Liberal insiders expect Trudeau to seek an election later this year to try to secure a majority in parliament. The Liberals currently need the support of at least one other party to pass legislation, including the budget.

Opposition lawmakers were unimpressed with the budget. But the leader of the left-leaning New Democratic Party said he was not prepared to bring down the government over it. "It is clearly irresponsible to have an election or in any way to trigger an election while we are in the midst of this third wave," Jagmeet Singh told reporters. "The impact on people would be devastating and we are not going to do that."

Erin O'Toole, who heads the official opposition Conservatives, said: "This is an election budget and a poor one at that." His party trailed the Liberals by 37% to 29% in an Abacus Data poll published last week.

Business groups were pleased with the added certainty of finally having a full budget, but remained unsold on the need for a massive stimulus plan with the economy already set to surge later this year as pent-up demand is unleashed.

"There's a lot of spending in a lot of programs. But the effects of all of those combined together for me is just a bit unsure," said Robert Asselin, senior vice president of policy at the Business Council of Canada.

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The deficit for the fiscal year that started on April 1 will be the second largest in recent decades, with the closely watched debt-to-GDP ratio hitting 51.2%, although Freeland promised a return to restraint as the economy gets back to normal.

"I think the key here is the debt-to-GDP (ratio) is expected to peak this year ... and it's expected to come down in the years ahead," said Doug Porter, chief economist at BMO Capital Markets. "I think that's a credible plan if they can stick to it."

THIRD COVID WAVE

Trudeau's Liberal government has been buoyed in opinion polls by its response to the COVID-19 pandemic. But a third wave of infections is pounding the country's largest city, Toronto, and its suburbs - a key Ontario region for securing an electoral majority - and the coronavirus vaccine rollout has trailed other wealthy countries like the United States and Britain.

Of the nearly C$50 billion in new spending this year, C$27 billion is set aside to extend pandemic recovery measures like wage and rent subsidies for businesses and for a new program to help transition companies back to hiring.

The budget also aims to create a national childcare program and to make a more aggressive effort to reduce carbon emissions, both measures that polls show are important to Liberal voters.

While Freeland said historically low interest rates allowed significant investment, she also pledged to unwind deficits and reduce the debt-to-GDP ratio over the medium term. A senior government official said, however, that a fiscal anchor should not be seen as a "straitjacket."

The official also said that the government had run stress tests on the accumulating debt and was confident of its abilities to service that debt even as interest rates rise in the future.

"It's hard for us to draw a conclusion that we're out over our skis. We don't believe we are. We think we're in very solid terrain," the official told reporters.

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Surging growth should also increase revenues, with 5.8% growth forecast for this year, after a 5.4% contraction in 2020.

The deficit in the current year is projected to hit C$154.7 billion, less than half that of the previous fiscal year, with total national debt soaring to C$1.23 trillion this year, up from C$1.08 trillion in the previous year.

The Canadian dollar steadied at about 1.2530 to the greenback, or 79.81 U.S. cents, after the budget was released. Canada's 30-year yield extended its rise, up 7.5 basis points at 2.060%.