By Promit Mukherjee

OTTAWA (Reuters) -Canadian Finance Minister Chrystia Freeland will have to find ways to amp up savings or raise taxes when she delivers the budget on Tuesday, as new heavy spending plans in the run-up further risks weakening government finances, economists say.

In the last two weeks, Prime Minister Justin Trudeau’s Liberal government has unveiled several proposals as part of the budget, funnelling billions of dollars primarily into housing but also into defense and healthcare.

But it has yet to elaborate on how these plans will be funded and what impact it will have on its fiscal anchors, and economists say even before the last two weeks’ announcements, the government was already on track to overshoot its deficit target.

In last year’s Fall Economic Statement (FES), the government’s new fiscal goals aimed to cap the fiscal 2023-24 budget deficit at C$40.1 billion ($29.12 billion), or about 1.4% of GDP.

Randall Bartlett, senior director of Canadian Economics with Desjardins Group, estimates the deficit in the fiscal year ended March 31 could be around C$47 billion, led by government expenses.

“We are committed to adhering to those guideposts,” Freeland told reporters on Thursday at the sidelines of a housing-related announcement, when asked about the impact of recent on the fiscal anchors.

“We recognize that Canada today needs our government to invest… And that requires the federal government to step up,” she added.

Canada is facing a housing affordability crisis due in part to a lack of supply, especially as it welcomes record numbers of migrants to meet labour needs. The opposition Conservative Party has attacked the Liberal government for the situation which has dented Trudeau’s popularity, opinion polls show. The next election is due by September 2025.

On Friday, the government announced a new housing plan under which it pledged to build 3.9 million homes by 2031.

The budget will be presented to the parliament on Tuesday at 4:00 p.m. EDT (2000 GMT).

Economists Douglas Porter and Robert Kavcic from BMO Capital Markets wrote last week that Ottawa will be “running very close to the line on some of those (fiscal) goals,” forcing the government to likely introduce new taxes, that are unpopular.

“Raising taxes will be an awful idea in an inflationary environment,” said Robert Asselin, senior vice president, of policy at Business Council of Canada.

It would result in less business investments that are badly needed to improve Canada’s productivity, he said.

To be sure, government revenues have increased by 3% for the first ten months of the year and its sovereign debt is among the best rated in the world.

Canadian economic activity has also rebounded even as interest rates are at a near 23-year high, with inflation consistently cooling off – a good sign for the Bank of Canada to cut interest rates.

Freeland said in February the budget would prioritize allowing for interest rates to come down.

The federal budget is also likely to include incentives for Canada’s large pension funds to increase their domestic equity investments and bring greater transparency in their investment decisions, according to industry sources.

It could also introduce a framework legislation for open banking – a secure way to transfer the financial data of users to approved third parties. The government could also announce plans to guarantee commercial loans to Indigenous communities to help them invest in resource projects.

Asselin from the Business Council of Canada said that to hit the fiscal deficit target, the government would need to re-purpose a lot of already committed money in future years.

“This budget will turn out to be quite a shell game in my opinion,” he said.

($1 = 1.3769 Canadian dollars)

(Reporting by Promit MukherjeeEditing by Denny Thomas and Josie Kao)

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