Canada's Liberals to unveil budget as inflation fears mount

Canada's Liberal government will unveil on Thursday its 2022 budget, which Prime Minister Justin Trudeau promised will be "fiscally responsible" after having already pledged billions in new programmes and increased military spending.

With Canada's economy fully recovered from the coronavirus pandemic, Trudeau's Liberals find themselves under pressure to pull back from new spending for fear of further boosting runaway inflation, which is already at a 30-year high. 

"The ultimate impact of higher spending will depend on the precise policy measures," Stephen Brown, senior Canada economist at Capital Economics, said in a note to investors.

"But, with the economy already at full capacity, the clear risk is that any extra stimulus will exacerbate inflationary pressures."

The budget will be presented to Parliament around 4 pm EDT (2000 GMT) by Finance Minister Chrystia Freeland. In describing the document, a senior government source told Reuters it could be divided into three buckets.

"There's a space for investing in people. There's a space for investing in climate transitions and the sustainable economy of tomorrow, and there's a space for investing in growth and innovation," said the source, who declined to be named ahead of the official announcement.

Included will be C$15 billion ($12 billion) over five years for a fund aimed at attracting private investment in new or green technologies, Reuters reported on Wednesday. 

The budget will also include at least C$2 billion for a strategy to accelerate Canada's production and processing of critical minerals needed for the electric vehicle battery supply chain, Reuters reported on Monday. 

New long-term spending on a national dental program for low-income Canadians is also expected to be featured in the budget, as it is a key peg in the Liberals' political support deal with the opposition New Democrats. That deal will cement Trudeau's power until 2025. 

His center-left party has also promised more spending on the military in the aftermath of Russia's invasion of Ukraine and a focus on affordable housing.

Canada's defense department could get up to C$8 billion in new money, the Canadian Broadcasting Corporation reported on Wednesday, citing a senior government source.

HIGHER INTEREST RATES

The federal government, under pressure to act on fast-rising home prices, also will ban foreigners from buying residential properties in Canada for the next two years, CTV News reported on Wednesday, citing a government source.

The overall housing package could include a tax-free savings account for first-time buyers. It is expected to cost C$10 billion in new spending over the next five years, CTV News added.

Trudeau, speaking to reporters on Wednesday, said a declining debt-to-GDP ratio would remain a core fiscal anchor in the "fiscally responsible" budget.

The Liberals, in a fiscal update in December, forecast the 2022/23 budget deficit would be C$58.4 billion, compared with a C$144.5 billion deficit in the 2021/22 budget. 

Some economists say additional fiscal spending will likely force the Bank of Canada to move aggressively to raise interest rates this year, including a rare 50-basis-point hike next week.

"The propensity to spend, despite revenue uplifts, reinforces our conviction around the Bank of Canada's next moves," Rebekah Young, Scotiabank's director of fiscal and provincial economics, said in a note.

($1 = 1.2513 Canadian dollars)