Deficits are survivable for Canada—economists

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In the wake of Finance Minister Bill Morneau’s economic update on Monday (February 22), economists remained upbeat of Canada’s prospects in the long run, despite a projected $18.4-billion shortfall this year (and another $15.5 billion next year) that has grown even before the implementation of the government’s spending plans.
 
“Even with such deficits, the debt-to-GDP ratio should remain low relative to other OECD economies. In our view the government has the flexibility to provide fiscal stimulus to a Canadian economy that badly needs it,” National Bank Financial senior economist Marc Pinsonneault told The Globe and Mail.
 
Pinsonneault said that such a move at this time “should hardly scare off foreign investors.”
 
BMO Nesbitt Burns chief economist Douglas Porter and senior economist Robert Kavcic concurred with this observation, saying that Ottawa can apply a moderate fiscal boost without inflicting lasting damage on its long-term debt outlook.
 
“The federal debt-to-GDP ratio has dipped in each of the past two years, and remains relatively low at 31 per cent. Additionally, total government debt (including other layers of government) remains comfortably below levels that prevailed during the mid-1990s when Canada’s credit rating fell under pressure,” the duo said in a report.
 
Porter and Kavcic added that this optimism needs to be tempered by reasonable caution, though, as an estimated $25-billion-plus every year deficit might prove to be a daunting opponent for the planned Liberal stimulus.
 
The shortfall has prompted various quarters to call on the Liberal government to aggressively go beyond its campaign promises. However, CIBC World Markets chief economist Avery Shenfeld assured that the 2016-2017 deficit is “hardly a blow-up,” as it would be only about 1.5 per cent of GDP.
 
“The only question is whether the modest dose of stimulus pledged in the campaign (roughly a half-per-cent of GDP) is enough to counter the drag on the economy from low commodity prices,” Shenfeld said.

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