(Bloomberg) -- Canadian Prime Minister Justin Trudeau signaled a return to his free-spending playbook as inflation wanes and an election looms, accelerating a bond selloff due to expectations of faster growth and a deeper deficit.
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On Thursday, Trudeau announced a C$6.3 billion ($4.5 billion) tax break and rebate package. It includes a two-month halt on federal sales tax on a variety of items including Christmas trees, wine, toys and books, as well as a C$250 check for nearly 19 million Canadians -- close to half the population.
The announcement appeared to mark the end of a brief chapter of greater fiscal restraint. For more than a year, Finance Minister Chrystia Freeland has promised to limit budget deficits to avoid fueling inflationary pressures.
Now, inflation is back to the Bank of Canada's 2% target, and policymakers have already trimmed the benchmark interest rate by 125 basis points since June. Trudeau's Liberal government sees a green light to dig deeper into the public purse -- but some analysts say investors are keeping close tabs on the country's indebtedness.
"Markets are no longer willing to give governments a free pass when it comes to fiscal stimulus like this. Even though this is relatively small in the big picture, it means more debt, all else equal," Taylor Schleich, a rates strategist with National Bank of Canada, said by email.
Bonds continued a selloff on Thursday after the announcement, and the 10-year benchmark yield rose 7 basis points on the day to 3.457%. After retail data on Friday showed a consumer spending rebound, it spiked as high as 3.488%.
Freeland said the stimulus package was meant to make Canadians' lives "a little bit easier, now that we have the space to do so." Asked whether it would be funded by other taxes, spending cuts or deeper deficits, Trudeau responded that Canada's debt-to-gross domestic product ratio is the lowest in the Group of Seven and the country's long-term fiscal picture is sustainable.
But as the government opens the door to more outlays, questions remain about the state of Canada's finances. Freeland has yet to report final spending and revenue numbers for the last fiscal year, though they are usually released in October. Parliamentary Budget Officer Yves Giroux expects a deficit of C$46.8 billion, blowing past Freeland's self-imposed target of a C$40 billion shortfall.