March 21, 2016 / 9:38 PM / 3 years ago

Canada set to buck G7 trend by unveiling stimulus-rich budget

OTTAWA (Reuters) - Canada’s new Liberal government will try to revive a flagging economy by unveiling one of the country’s biggest deficits since the 2008 financial crisis in Tuesday’s federal budget, making it a rarity among Group of Seven peers more focused on austerity.

Canada's Prime Minister Justin Trudeau speaks during Question Period in the House of Commons on Parliament Hill in Ottawa, Canada, February 24, 2016. REUTERS/Chris Wattie

Prime Minister Justin Trudeau’s government is expected to run a deficit of about C$30 billion ($22.93 billion)- three times as large as promised during last year’s election campaign - with the focus on infrastructure spending it hopes will spur hiring and growth.

The drop in the price of oil, a major export for Canada, has battered the economy, putting it in a brief recession last year and forcing the Bank of Canada to cut rates twice in 2015. The government warned last month it would run bigger deficits than it had anticipated because of the weak growth outlook.

Its move to increase the deficit to spend more aligns it with some economists and the Group of 20, which has called for governments to use fiscal and structural policies as stimulus tools, taking some of the burden off central banks.

“With the arguable exception of Japan ... doing so from a position of fiscal strength, which Canada is doing, is absolutely not seen in any other G7 country,” said Jacob Kirkegaard, Washington-based senior fellow at the Peterson Institute for International Economics.

Trudeau, who took office in November, has two big advantages. Canada escaped the credit crisis largely unscathed, leaving its federal debt-to-GDP ratio at a relatively low 31 percent, according to the country’s Finance Department. His government also holds a majority in the country’s Parliament, leaving it free to pass legislation without support from other parties.

While the former Conservative government of Stephen Harper ran a stimulus plan to combat the 2008 financial crisis, it emphasized rebalancing the books. Trudeau instead campaigned on a plan to take Canada back into deficit.

“Britain and Germany are firmly on the other side. Quite frankly, with the conditions we have in Canada, I’m happy to showcase that we think drawing in investment and creating opportunities for sustained growth ... are where we want to be,” Trudeau said at a recent event in New York.

In the British budget last week, Finance Minister George Osborne stuck to his plan to turn the deficit into a surplus by 2020.

Other industrialized nations will be watching Trudeau’s moves but are not expected to follow suit in the short term, given their own financial challenges and domestic politics, Kirkegaard said.

Former Bank of Canada Governor David Dodge, who was appointed by a Liberal prime minister, said Canada’s use of fiscal stimulus could be a good example for its U.S. neighbor. But he added there was no simple formula that worked for every country.

The Conservatives and other critics said Ottawa risked letting debt get out of control.

“I do not think it’s going to be effective,” said William Robson, president of the C.D. Howe Institute. “I will be watching closely to see if there’s any kind of credible plan back to balance in this budget.”

Additional reporting by David Ljunggren in Ottawa; Editing by Peter Cooney

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