LONDON (Reuters) - Canada's decision to borrow more to fund major infrastructure investment could show other rich countries how to boost growth at a time when central banks have little room to do so, its finance minister Bill Morneau said on Friday.
In its first budget since an unexpected election victory last year, Prime Minister Justin Trudeau's Liberal government reversed the course of the previous Conservative administration, whose deficit-reduction strategy had been praised by Britain and Germany as they pursued similar goals.
Hit by a slump in oil and other commodities prices and seeing limits to the Bank of Canada's room to boost growth with interest rates near zero, Morneau set out plans to borrow three times as much as promised before the election, even as most wealthy nations strive to limit their borrowing.
He is looking to fund investment in transport and innovation, which he hopes will boost long-run growth, as well as social projects such as clean water for aboriginal reservations.
"Our Bank of Canada has done a good job over the course of the last number of years in managing monetary policy, and I'm sure they will continue to do so, but the impact of that on growth is going to be less – based on where we are in the cycle – than fiscal measures," Morneau said in an interview after speaking at a Thomson Reuters Newsmaker event in London.
The International Monetary Fund is expected to cut its global growth forecasts next week and Christine Lagarde, its managing director, has warned that growth could get derailed without joint action by major economies.
Morneau said his plans had met a positive reaction at a meeting of finance ministers in Paris on Thursday.
"The best way we can make a recommendation on something is by saying 'Here's what we're doing'," he said.
However, Canada has more scope to raise borrowing than most. Even the new plans for the federal government to borrow around C$29 billion this year and next amount to only 1.5 percent of gross domestic product -- less than any other major advanced economy apart from Germany.
Canada's growth has also started to pick up, even before the new spending starts, and the Canadian dollar touched a 5-month high against its U.S. counterpart on Thursday after better than expected January GDP data.
Morneau said earlier he was "delighted" by the figures but would stick with his investment plans even if growth picked up more strongly than expected.
He declined to be drawn on whether Canada would prefer to see Britain vote to remain in the European Union or leave in a referendum on June 23.
As to whether he would prefer fellow Canadian Mark Carney to extend his term as Bank of England governor, or return to Canada after his term expires in mid-2018, Morneau was also guarded.
"We will always support Mark. He is a great Canadian export, and I'm sure he will continue to be successful."
Carney has said he will need to decide by the end of this year if he wishes to stay longer in Britain.
Additional reporting by Axel Threlfall; editing by Larry King