Canada

Thursday, January 23, 2020 - 13:10

MNI POLICY: Morneau: Deficits Ease Pressure For Low BOC Rates


--Canadian Finance Minister Says He Has More Firepower For Downturn

OTTAWA (MNI) - Canada's finance minister said Thursday deficit spending is taking pressure off the central bank to drive growth with ultra low interest rates, and he has plenty of firepower to deal with any future downturn.

Bill Morneau said the current deficit of roughly 1% of GDP helps make sure the central bank isn't alone in supporting growth. The government introduced a family tax cut after being re-elected late last year and before that moved to mirror U.S. tax cuts on new business investment.

"We can have the right fiscal approach which means our bank isn't completely responsible for all of the growth in our country," Morneau said during a panel at the World Economic Forum in Davos, Switzerland. "That's led us to a position where we continue to have interest rates that are in positive territory."

Morneau spoke the day after BOC Governor Stephen Poloz opened the door to a rate cut that would be his first since 2015. The BOC reported signs that a slowdown that started in the fourth quarter may persist as global trade tensions appear to be eroding domestic spending on top exports and investment. Morneau didn't directly reference Wednesday's decision to hold the BOC rate at 1.75%, the G7's highest after the Fed cut three times last year.

"We have again made investments into our economy, fiscal investments, because we know that is a way that we can balance how we are making sure that our economy continues to grow," Morneau said. That means "monetary policy is such that it isn't going down to the very, very lowest rate, creating inappropriate incentives and things that might get out of control," he said.

Finance Department officials briefed Morneau last year on how the era of low interest rates suggested fiscal policy must take a greater role in fighting the next downturn, according to a document obtained by MNI.

--SIGNIFICANT FIREPOWER

"Our fiscal track is a responsible one leaving us in our situation with significant firepower if those geopolitical risks or these trade tensions that we see cause problems that might not be evident today but could be evident tomorrow," Morneau said.

Morneau focused on "investments" funded by deficit spending Thursday more than any plans to balance the budget. Morneau's Liberals led by Justin Trudeau abandoned earlier commitments to curb the deficit in favor of reducing the debt from around 30% of GDP and keeping the nation's triple-A credit rating.

"We still are reducing that debt as a function of our GDP, and the deficit as a function of GDP, each and every year." Last month Morneau boosted the deficit for the fiscal year ending March 31 to CAD26.6 billion from CAD19.8 billion on employee pension costs, and to CAD28.1 billion for fiscal 2020-21.

Poloz credited federal spending on infrastructure and other stimulus for providing ongoing support for growth at a press conference yesterday after the rate decision.

--HOUSEHOLD DEBT

Household debt is a top concern, Morneau said, while rising corporate debts are being backed by strong profit margins.

"I do take a lot of time focusing on the individual issue, on the household debt, which obviously has been exacerbated based on the low interest rates," he said. "The risk in Canada is relatively well managed" based on tighter macroprudential rules and a "very well managed" banking sector, Morneau said.

--MNI Ottawa Bureau; +1 613-314-9647; email: greg.quinn@marketnews.com

[TOPICS: M$C$$$,MC$$$$]

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