Canada’s Finance Minister is sticking by his pledge to lower the nation’s debt ratio, signalling the government won’t push much deeper into deficit when it delivers its budget this week.

Bill Morneau said he remains committed to the notion a falling level of debt relative to the total size of the economy shows fiscal prudence. The country’s low growth, along with new spending on infrastructure and transfer payments, has forced the government to abandon other fiscal pledges.

“We think that keeping our net-debt-to-GDP on a path, on a declining path, shows a sense of fiscal responsibility that allows us to make investments with confidence and not find ourselves in more difficult fiscal situations down the road,” Morneau said March 18 in an interview in Baden-Baden at the Group of 20 summit.

Canada’s economy has improved of late, posting its best growth since 2013 in the second half of last year. Challenges remain for Morneau: exports have been disappointing and business investment remains muted on concern the U.S. will impose border taxes, making trade more costly. Low borrowing costs have continued to fuel cheap mortgages, increasing the risks of a housing bubble in some cities.

Morneau said the March 22 budget will avoid further moves aimed at cooling the country’s hottest real estate markets. It will also “say things on tax,” while introducing skills-training programs and “new measures that will be important for Canadian families.”

The budget “will definitely continue to show Canadians that the Trudeau government’s responsible — responsible fiscally and able to manage investing while paying attention to the bottom line.”

Worsening Outlook

This will be Morneau’s second budget, the federal government’s foremost fiscal and policy document of the year. But the picture has worsened since he and Prime Minister Justin Trudeau’s Liberals took power late in 2015.

Although they campaigned on promises to cap deficits and impose a target date for return to balance, those pledges were abandoned. The only remaining so-called fiscal anchor is the debt-to-GDP target.

The budget has been preceded by warnings to ministers that the cupboard is bare, and this one will strike a different tone than his first, Morneau said.

“Budget 2016 was very much about confidence. It was about dealing with middle class anxiety,” he said. “We want to now lay out a long-term vision that expands upon what we started talking about last year. We want to help Canadians to see not only how their families will do better today but how they’re going to be able to deal with a dynamic and changing economy in the future.”

The budget will include new programs for skills training and “identify sectors where we think Canada has a competitive advantage,” while driving Canadian workers to those sectors, Morneau said. He declined to detail any new tax measures.

Morneau also wouldn’t say whether the budget will include some form of risk adjustment. Historically, that’s meant either a line-item set aside for emergency spending, or a low-ball GDP estimate, as a safety net. Canada’s debut budget included one, but its fall fiscal update didn’t. “Our thinking will be based on our sense of what the relative upsides and downsides are of the economy,” Morneau said.

Toronto Housing

Canada doesn’t have any further imminent policy moves to cool the housing markets in Toronto and Vancouver, where policy makers have already taken steps to mitigate the risk of a market collapse.

In late 2015, the federal government raised financing requirements for homes between $500,000 and $1 million. Then in October, Morneau tightened mortgage eligibility rules, a measure whose impact will gradually “move through the market as people take on new mortgages,” he said.

The federal government hasn’t studied whether policy makers in Toronto should impose a foreign buyer’s tax similar to that introduced in Vancouver, Morneau said.

Canada has also proposed shifting more mortgage default risk to lenders and has sought input from banks and other institutions, although final rules haven’t yet been revealed. Morneau said they would be “in the not-so-distant future,” though he declined to say if that would be in 2017. The minister struck an optimistic tone on housing.

“We do believe that our economy is starting to do better,” he said. “We’ve seen a reduction in unemployment, we’ve seen the beginnings of an uptick in growth. Those things are positive, those are also things that give people more capacity in terms of their ability to buy a home. So we’ll have to watch carefully.”

Uncertainty over U.S. policy is among the things that make forecasting difficult, he said, while downplaying the impact Donald Trump’s administration will have on Canada’s budget. Canada, which relies on the U.S. for a larger share of its total trade than any other G-20 country, is now bracing for renegotiation of the North American Free Trade Agreement and a potential border tax favored by U.S. House Speaker Paul Ryan.

U.S. policies “have an impact on our expectations for global growth, and that’s part of the economic forecast that we use as our baseline,” Morneau said. “But most of our efforts were very focused on where we can make investments inside Canada.”

Bloomberg.com