Canada’s highly-anticipated federal budget will be unveiled on Tuesday. The BoC has placed much emphasis on fiscal policy as a necessary tool, and is counting on a combination of infrastructure spending and tax cuts, as promised by PM Trudeau, to provide a moderate boost to growth.
The budget, in addition to a weak currency and solid US demand, is key to the BoC’s growth scenario in aiding the economic reorientation to non-resource activity and providing a buffer to rising financial vulnerabilities in regions hurt by the oil shock. We expect significant increases in the projected fiscal deficit to roughly CAD25-30bn for the next two fiscal years.
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The larger deficit will be incorporated in the BoC’s April MPR projections, and depending on the size would limit the scope for monetary easing to the detriment of rate cut expectations.
However, despite potential upside in the near-term, the downside to the currency will linger over the medium-term as oil and Fed divergence remain drivers.