Economists say Liberal-NDP deal raises deficit, inflation alarm bells
Prime Minister Justin Trudeau's surprise political deal with the smaller left-leaning New Democrats will lead to heftier deficits and threatens to upend the Liberal government's promise to rein in runaway inflation, economists said.
Trudeau on Tuesday announced a rare written "supply-and-confidence" agreement that will see the NDP prop up his minority government until 2025 in exchange for more social spending.
Top of the list is a dental-care program for low-income Canadians and a national prescription drug plan, both of which will likely be costly, permanent spending initiatives, economists said. Details of the two programs should emerge in the federal budget due to be presented next month.
With the Canadian economy already at capacity and price pressures mounting, incremental spending - even if merited - could complicate efforts to keep inflation expectations moored, said Rebekah Young, director of fiscal and provincial economics at Scotiabank.
"The finance minister risks further undermining Ottawa's credibility in its commitment to tackling inflation," she said.
Young expects the pact, which has been denounced by the main opposition Conservatives, will lead to an additional $15 billion-$20 billion in government spending over the life of the three-year deal and potentially $40 billion in total by fiscal 2026-2027.
The jump in tax revenue resulting from surging inflation will likely mask much of the new spending in the near term, she said, but the deal could add half a percentage point to structural deficits over the medium term.
Fitch Ratings stripped Canada of one of its coveted triple-A credit ratings in June 2020. S&P Global Ratings and Moody's Investors Service still give Canadian debt their highest ratings.
The federal government's COVID-19 pandemic support programs have already pushed Canada's debt-to-GDP ratio to a projected peak of 48.0% in 2021/2022 from 30.9% in 2018/2019. It could decline more slowly from there due to the increased spending.
"It does look like it would open the pocket books at the federal level," said Pedro Antunes, chief economist at the Conference Board of Canada.
Canada, like other countries globally, is grappling with red-hot inflation, which hit a three-decade high of 5.7% in February. At the same time, businesses are scrambling to hire enough workers to meet booming demand.
New federal dental and prescription drug programs would require more specialized workers, who may demand higher wages, which could then create another round of inflation, Antunes said.
"We can start getting to that vicious spiral that we don't want to be in," Antunes said.
DEFENCE SPENDING
The Liberals pledged $78 billion in stimulus over three years during last year's election campaign. The NDP's platform had priced a national drug plan at $38.5 billion over five years and $11 billion for dental coverage.
Spending under the deal will likely look quite different.
With Canada's economy firing on all cylinders, analysts say the centre-left Liberals should be focused on balancing the budget rather than adding stimulus so businesses do not grow concerned about the possibility of higher taxes.
"The right path is to grow the economy to pay for new spending measures – not the other way around," said Robert Asselin, senior vice president of policy at the Business Council of Canada.
Adding to swelling expenses is the response to Russia's invasion of Ukraine, which may prompt Canada to boost defence spending.
"Our investments in our Canadian Armed Forces will continue to increase and we will have more to say about this at the appropriate time," said Trudeau, speaking at a summit in Brussels to address the Ukraine crisis.
Trudeau said his deal with the NDP will not impact defence spending plans.
IN DEPTH

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Opinion

OPINION Don Martin: Canada is back on the world stage. And mostly alone.
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Nice try, prime minister. But likely too little, too late and too transparently desperate to serve as a realistic government-salvage strategy, writes Don Martin in an exclusive opinion column for CTVNews.ca.
opinion Don Martin: Poilievre doesn't feel your pain, but he's sure good at communicating it
Probably no other leader, including Justin Trudeau, has landed in a party leadership with less real-world work experience than Pierre Poilievre, says Don Martin in a column for CTVNews.ca. But Poilievre's an able communicator, and this weekend's Conservative convention is a golden opportunity for him to sell himself as PM-in-waiting.
opinion Don Martin: Who will step up to have 'The Talk' with Trudeau?
Ego and vanity are a potent combination in leadership politics, and in his exclusive column for CTVNews.ca, Don Martin writes this condition is infecting Prime Minister Justin Trudeau's mindset as he seems deadly serious about seeking re-election in 2025.
opinion Don Martin: I've never seen anything quite like the control-everything regime of Trudeau's government
Voters in four byelections delivered status quo results on Monday that show, if you squint hard enough, that the severely tainted Liberal brand has staying power while the Conservatives aren’t resurging enough to threaten as a majority-government-in-waiting, writes Don Martin in an exclusive column for CTVNews.ca.
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