Justin Trudeau’s government made every effort on Wednesday to convince Canadians the country can afford a budget deficit that will soar to 16% of economic output this year. Its actions suggest there’s some worry.
Economists use different models to estimate the neutral rate. Widely cited
estimates from Federal Reserve economists Kathryn Holston, Thomas Laubach and John Williams put the real (or inflation-adjusted) neutral rate at about 0.6% in the United States as of the second quarter of 2018. This measure has declined over time. The chart below shows the Holston, Laubach, Williams (HLW) estimate of the long-run neutral rate for the US since the 1970s. Since 1972, the estimated neutral rate has declined by 2.8 percentage points.
Canada’s largest lenders are warning Prime Minister Justin Trudeau’s government it doesn’t have carte blanche to run massive budget deficits, even though there’s some room for additional spending in the next couple of years.
Advanced economies should not worry about debt, but instead take advantage of historically low borrowing costs to increase spending on infrastructure maintenance immediately, the IMF said in a report published on Monday.