Canada budget seen fleshing out spending plans to spur growth

OTTAWA (Reuters) - Canada’s finance minister will give an update on the deficit when he presents the federal budget on Wednesday, hoping to flesh out plans to spend the way to growth without drawing the wrath of debt-rating agencies and businesses struggling to compete.

FILE PHOTO -- Canada's Finance Minister Bill Morneau receives a standing ovation while announcing the date of the federal budget during Question Period in the House of Commons on Parliament Hill in Ottawa, Ontario, Canada, March 7, 2017. REUTERS/Chris Wattie/File Photo

Analysts say key questions about debt and potential tax increases remain, although the annual fiscal blueprint is not expected to have the news splash of last year, when the new Liberal government unveiled a stimulus budget centered on infrastructure spending and much bigger deficits than it campaigned on.

If the ratio of debt to gross domestic product gets too high under Prime Minister Justin Trudeau and Finance Minister Bill Morneau, Canada could lose its AAA credit rating, although the nation remains on stronger fiscal footing than most of its peers.

Rising bond yields will also boost the cost of servicing Canada’s debt, projected to rise to C$642 billion ($480.36 billion) this year.

Tax increases are a big unknown. Businesses fear higher capital gains taxes would harm competitiveness just as U.S. rivals benefit from a break in taxes and regulation under U.S. President Donald Trump.

“The issue of competitiveness has become more urgent following the U.S. election ... so I will be looking for concrete plans to bring more business to Canada and keep Canadian business at home,” said Manulife Asset Management senior economist Frances Donald.

Recent signs of long-awaited strengthening of economic growth probably came too late to help Morneau trim yawning annual deficits but could give him more room to reinstate a fiscal cushion, or prudence fund, spent last fall to help trim the budget gap to C$25.1 billion this year.

Morneau has not said when the government hopes to return the budget, balanced under the previous Conservative government, to the black. Instead he has pointed to a projected narrowing of the debt-to-GDP ratio to just over 30 percent by 2022 as investment in infrastructure, innovation and job training boosts growth.

Uncertainty about trade policy of the United States, Canada’s largest export market, has increased speculation that Morneau might delay some policy changes until the fall fiscal update, when the impact of Trump’s policies are clearer.

“The tone seems to be that a lot of policymakers here are waiting to see what happens with fiscal policy south of the border before they make any major decisions,” said BMO Capital Markets senior economist Robert Kavcic.

Additional reporting by Leah Schnurr; Editing by Lisa Von Ahn