February 23, 2016 / 10:35 PM / in 4 years

Canada's Liberals to cap budget deficit at C$30 billion: sources

OTTAWA (Reuters) - Canada’s ruling Liberals will cap the coming year’s budget deficit at C$30 billion ($21.81 billion)- three times larger than originally pledged - as they try to stick to long-term budget plans, according to senior government sources.

Canada's Prime Minister Justin Trudeau speaks during Question Period in the House of Commons on Parliament Hill in Ottawa, Canada, February 22, 2016. REUTERS/Chris Wattie

Four insiders, who spoke on condition of anonymity because of the sensitivity of the topic, said a 2016-17 deficit of C$30 billion, or about 1.5 percent of GDP, is the most Prime Minister Justin Trudeau’s team will tolerate given its longer-term goal of lowering the country’s debt-to-gross domestic product ratio, now about 31 percent.

“The maximum deficit we can run and keep the ratio falling is around C$30 billion and that is the absolute upper limit,” said a top Liberal with knowledge of Trudeau’s thinking.

A pledge to break with austerity by running annual deficits of C$10 billion helped Trudeau defeat the Conservatives in last year’s election.

But since then, weak oil prices have sapped economic growth and tax revenue. Finance Minister Bill Morneau said on Monday the 2016-17 budget gap would be C$18.4 billion even before promised stimulus measures that economists see adding C$10 billion to $12 billion..

“If you’re going to go big, you go big at the beginning, and then start tapering back,” said another government official.

The Liberals will release the federal budget on March 22.

Liberal legislators and officials said the dire state of the economy meant there was little open dissent inside the caucus about running a deficit much larger than the party campaigned on.

That said, some on the right wing of the party - who remember the days when the Liberals were lauded for surpluses - privately admit to some nervousness.

“Is it of concern? Of course it is. Will it derail us from our agenda? We may have to swallow hard on that - we may end up having to postpone a few things because you can’t just go with runaway deficits,” said a veteran Liberal.

Deficit spending is a change for the current generation of Liberals, who when in power from 1993 to 2006 took pride in eliminating a large shortfall inherited from the Conservatives.

The deficit started to spiral in Canada between 1968 to 1984, a period when Trudeau’s father Pierre was prime minister for all but nine months and ramped up public spending.

The debt-to-GDP ratio was just over 20 percent when he took power and by the 1984/85 fiscal year it was more than 40 percent, according to Finance Ministry data. It hit a peak of just under 70 percent in 1995/96.

The next election is not scheduled until October 2019. But the Liberals - slammed as spendthrifts by the opposition Conservatives on Monday - will have to convince voters well before then that they are in control, said party insiders.

Trudeau will have no difficulty implementing his agenda for now given his Parliamentary majority and an unusually long post-election honeymoon.

On Tuesday, a Nanos Research poll on who would make the best prime minister put Trudeau 36.5 percentage points above his closest rival.

Editing by Jeffrey Hodgson and Alan Crosby

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