MNI: Canada Approved CAD95B Geopolitical Contingency Borrowing

Canada's cabinet in late March approved a borrowing plan with a CAD95 billion "contingency margin" because of geopolitical risks and officials discussed how it might be used, according to a briefing document obtained by MNI, specifying an amount which if tapped would exceed the largest deficit on record outside the pandemic.

The finance department's top civil servant was sent a memo giving "an overview of how the government could fund a significant fiscal shock." The three pages provided to MNI under a freedom of information request made redactions including the exact date of the report, and a finance official told MNI Friday the memo was dated March 26. Mark Carney took over as prime minister from Justin Trudeau on March 14, pledging an "elbows up" stance against Donald Trump's threats of using economic force to make Canada the 51st State.

The document didn't spell out what event would trigger extra borrowing, and Finance Minister Francois-Philippe Champagne says there won't be a budget that's usually presented in the spring until the fall of this year. The finance department's website also doesn't list any recent published Debt Management Strategy for the fiscal year that began April 1. 

"Financial Sector Policy, in consultation with Fiscal Policy, has provided a draft Debt Management Strategy 2025-26 to the Minister outlining our borrowing for the coming year, and the Governor-in-Council has approved the 2025-26 annual borrowing authority," the document said.

"Given heightened geopolitical uncertainty, the annual borrowing authority includes a $95 billion contingency margin," the report said. "The Funds Management Committee has discussed how to deploy contingency borrowing in the event of a fiscal shock, and the Bank has estimated cost impacts." The Bank of Canada serves as the government's fiscal agent including tasks such as organizing debt auctions.

The finance official told MNI via email Friday that with a budget coming this fall after the start of the current fiscal year, spending rules allow a contingency "to provide flexibility for the Minister to prudently respond to changing financial requirements without the need to frequently return to Cabinet."

"The contingency margin is not tied to a specific use, but rather ensures the Government can act quickly if needed. Details are not shared to prevent market participants from positioning ahead of the Government’s response. It should not be interpreted to mean that the Government sees an economic downturn as likely," the official said. 

"With the heightened geopolitical uncertainty at the start of the year, Cabinet increased the size of the contingency margin to ensure that the Government could respond quickly and prudently in the event a fiscal shock was to materialize," the official said.

The CAD95 billion is large compared with Canada's recent budget figures. Carney won the April 28 election with a plan to boost the deficit to CAD62 billion this fiscal year, about a record in cash terms outside of the pandemic, and about 2% of GDP. (See: MNI INTERVIEW: Mild Stimulus Cures Canada Recession- Ex-Clerk) 

Canada's biggest deficits were CAD328 billion and CAD90 billion during Covid when the government paid people to stay home, and before that the peak was CAD56 billion during the 2008 global financial crisis. 

The document redacted sections on "Potential response to a fiscal shock," on "Cost implications" and on "Next Steps." Redactions were made under legal exemptions for the economic interests of Canada and advice including to a minister. 

(See excerpt of document below)