Canada to go big on budget spending as pandemic lingers, election looms

By Julie Gordon

OTTAWA (Reuters) - Canada's Liberal government will deliver on its promise to spend big when it presents its first budget in two years next week amid a fast-rising third wave of COVID-19 infections and ahead of an election expected in coming months.

Finance Minister Chrystia Freeland has pledged to do "whatever it takes" to support Canadians, and in November promised up to C$100 billion ($79.8 billion) in stimulus over three years to "jump-start" an economic recovery in what is likely to be a crucial year for her party.

Prime Minister Justin Trudeau's Liberals depend on the support of at least one opposition group to pass laws, and senior party members have said an election is likely within months as it seeks a clear majority and a free hand to legislate.

Furthermore, by September, all Canadians who want to be vaccinated will be, Trudeau has said.

Freeland has said the pandemic created a "window" of opportunity for a national childcare plan, and that will be reflected in next Monday's budget along with spending to accelerate Canada's shift toward a more sustainable economy.

"It will be a green and innovative recovery plan aimed at creating jobs," said a government source who declined to comment on specific measures. The budget will aim to help those "who have suffered most" the effects of the pandemic, the source said.

Critics say the government would be better to hold off on blockbuster spending because the economy has shown it is poised to bounce back, and to prevent the country from racking up too much debt.

"Clearly a garden-variety stimulus package is the last thing we need. This is pile-on debt," said Don Drummond, an economist at Ontario's Queen's University.

"The risk is that at some point interest rates are going to go up and we're going to be in trouble," he said, pointing to the mid-1990s when Canada's debt-to-GDP ratio skyrocketed, leading to rating agency downgrades and years of austerity.

The Bank of Canada cut its benchmark interest rate to 0.25% to counter the economic fallout of the COVID-19 crisis and has said rates will not rise until labor market slack is absorbed, currently forecast for into 2023. That may change when it releases new projections on April 21.

EXPANDING ECONOMY

More than 3 million Canadians lost their jobs to the pandemic. As of March, before a third wave forced new lockdowns, only 296,000 remained unemployed because of COVID.

Despite still-high unemployment levels in hard-hit service sectors, the economy has expanded for nine straight months even as provinces have adjusted health restrictions to counter waves of infections.

"Once we see sustained reopening, we do think that the recovery will have quite a bit of momentum on its own," said Josh Nye, a senior economist at RBC Economics.

"We think Canada's economy will be operating pretty close to full capacity by this time next year," he said.

Economists surveyed by Reuters expect Freeland to project a deficit in the range of C$133 billion to C$175 billion for fiscal 2021/22, up from the C$121.2 billion ($96.7 billion)

deficit forecast in November. https://tmsnrt.rs/3wSJPcm

The deficit for fiscal 2020/21 ended in March is forecast by the government to top a historic C$381.6 billion ($304.5 billion).

Canada announced on Monday a C$5.9 billion ($4.7 billion) aid package for the country's largest airline carrier, Air Canada, and said talks were ongoing with No. 2 carrier WestJet Airlines Ltd and others.

(Reporting by Julie Gordon in Ottawa; Additional reporting by Fergal Smith in Toronto; Editing by Steve Scherer and Peter Cooney)