Canada Budget: More an update than a budget – Nomura

According to the analysts at Nomura, the recently released Canadian 2017 Budget contained no new substantial announcement and if anything, the main announcement from the Budget is that the government is waiting on the Trump administration plan on taxation to decide how best to modify Canada’s tax system to react to changes south of the border.

Key Quotes

“While there was no major announcement, the federal government expects to spend about C$3.1bn more in FY2017-18, C$3.4bn in FY2018-19, C$5.1bn in FY2019-20, C$4.4bn in FY2020-21 and C$3.5bn in 2021-22. However, we note that the government includes C$3bn in the deficit as a reserve for risk. This means that the actual increase in spending over the entire budget period is only C$4.5bn for the next five years.”

“Since the Fall Economic Statement (FES) in November, growth forecasts for this year have been revised lower to 1.9% vs. 2.1%, and higher next year (to 2.0% vs. 1.8%). There is little change to the overall budget for the projection period compared to the November budget. The government’s projected path of the debt-to-GDP was shifted down between now and FY19-20, where the ratio is projected to settle at 31.5%. Beyond that, debt as a proportion of GDP is projected to continue to fall but settle at a higher level than what was projected in the last FES, ultimately settling at 30.9% in FY21-22 (vs. 30.4% in the November FES).”

“Overall, there is not much new in this Budget. However, considering the amount of spending committed last year and what remains in the pipeline, and that the economy is gradually improving, there was little need for an increase in the level of fiscal stimulus. Nevertheless, the government continues to push further away the objective of balancing the budget. However, while the federal government expects fiscal deficits to remain until at least FY2021-22, the level of the debt-to-GDP is expected to drift slightly lower. There are some risks that rating agencies could take note of the lack of plan in the medium term to address this situation, but we do not believe Canada’s AAA rating is at risk.”

“The relatively neutral fiscal policy is likely to have little impact on our economic outlook for Canada. We continue to believe that Canada’s growth should improve somewhat in 2017, as the drag on growth coming from business investment is likely to abate. However, many risks remain to the outlook, especially the impact of President Trump’s policies on Canada. We continue to believe that the BoC will leave its policy rate unchanged for the rest of the year.”