January 13, 2016 / 10:13 PM / 2 years ago

Canadian Liberals set to bust deficit pledge as oil tumbles

OTTAWA, Jan 13 (Reuters) - Canada’s Liberal government looks certain to break its promise to keep budget deficits to C$10 billion ($7 billion) a year but a deteriorating economy makes it hard to determine how large the shortfall will be, according to sources familiar with the party’s plans.

The Liberals, elected last year on a promise to boost infrastructure spending, are likely to unveil their first budget by the end of March as decade-low oil prices slam economic growth and government revenues.

Finance Minister Bill Morneau has consistently sidestepped questions about the deficit cap, placing more emphasis on another pledge, to ensure the ratio of debt to gross domestic product (GDP) continues to fall.

“Let’s be real here: the minister has already fundamentally said that the C$10 billion limit is out of the window,” said one Liberal source, who declined to be identified because of the sensitivity of the subject.

Morneau said on Wednesday that now was the time to make promised investments in infrastructure, especially given very low interest rates.

Another source familiar with Liberal thinking said the party would find it hard to row back on its spending promises.

“It’s going to be a bigger deficit than we expected. They’ve really committed themselves to the infrastructure spending,” the source said. “The challenge right now is no one really knows where the economy is heading.”

The government’s fiscal update in November called for West Texas Intermediate crude oil at $50 a barrel in the first quarter of 2016, about $20 above where it is now.

In the October election the Liberals successfully challenged what had become political orthodoxy in Canada by promising to put the federal budget back into deficit, on the grounds that the economy needed to break out of a pattern of consistent sub-par growth.

The prospect of a C$10 billion deficit caused little concern in financial markets given Canada’s triple-A credit rating and a federal debt-to-GDP ratio of 31.0 percent as of end-March 2015, far lower than the United States.

International Monetary Fund figures for 2014 puts the Canadian ratio of general government net debt to GDP at 37.3 percent, and the U.S. ratio at 79.7 percent. The IMF figures are not directly comparable to the Canadian figure of 31.0 percent.

Given a debt load of C$613 billion and assuming the economy does not slide back into recession, the Canadian government could boost its spending well above C$10 billion and still see the debt-to-GDP ratio falling.

If nominal GDP growth hit 4 percent, the deficit could go as high as C$24 billion and still see the debt-to-GDP ratio fall.

Asked if the Liberals could go as high as C$25 billion, the first source said: “That feels high and it’s probably unnecessary. The other issue is that even if you had all that money, could you spend it effectively?”

Even if the deficit were substantially more than C$10 billion, the newly elected Liberals might not suffer much long-lasting political damage given how early they are in their four-year term, noted a senior source with the official opposition Conservatives.

“The next election isn’t until 2019: is it credible to think that one of (the Conservative Party‘s) campaign planks will be the 2016 budget deficit?” the source asked.

$1=$1.44 Canadian Additional reporting by Leah Schnurr; Editing by Lisa Shumaker

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