Justin Trudeau tries deficit spend­ing to jolt Canada’s econ­omy

A short­fall in tax rev­enue and ex­tra spend­ing drive up the deficit “He’s in the hon­ey­moon phase still a lit­tle bit”

Bloomberg Businessweek (Europe) - - CONTENTS - −Josh Win­grove

A fad­ing Cana­dian econ­omy is putting Justin Trudeau’s op­ti­mism to the test. On Feb. 22 growth pro­jec­tions for 2016 were low­ered from 2 per­cent to 1.4 per­cent. Canada’s dol­lar fell al­most 10 per­cent against the green­back in Trudeau’s first 11 weeks in of­fice. Now his fi­nance min­is­ter has pre­viewed the March 22 bud­get by re­veal­ing that the deficit will be higher than Trudeau’s Lib­eral Party an­tic­i­pated.

All three of the com­mit­ments Trudeau gave dur­ing the au­tumn cam­paign to quell con­cerns about his fis­cal man­age­ment are fall­ing by the way­side. He pledged the bud­getary short­fall would be no more than C$10 bil­lion ($7.3 bil­lion) a year. Min­is­ter of Fi­nance Bill Morneau is sig­nal­ing that the fig­ure will be closer to C$30 bil­lion ($22 bil­lion) once cam­paign prom­ises are fac­tored in. That will make it un­likely that Trudeau can ful­fill his other two com­mit­ments: to bal­ance the bud­get by 2019 and keep de­creas­ing the na­tional debt as a share of the econ­omy.

De­spite all the neg­a­tive eco­nomic news, driven in large part by the col­lapse of oil prices, the rookie leader and son of for­mer Prime Min­is­ter Pierre Trudeau is more pop­u­lar than ever. Deficits “won’t hurt his num­bers un­til there’s some eco­nomic event that ac­tu­ally af­fects peo­ple’s daily lives,” such as lay­offs or an­other plunge in the dol­lar, says Toronto poll­ster Lorne Bozi­noff of Fo­rum Re­search. A poll in Fe­bru­ary found sup­port for Trudeau’s party at 49 per­cent, up from 39 per­cent on Elec­tion Day in Oc­to­ber. “He’s in the hon­ey­moon phase still a lit­tle bit,” says Bozi­noff. “He’s got that, but he’s got to now start to re­ally de­liver.”

Many of Canada’s fore­most econ­o­mists back deficit spend­ing. Econ­o­mist David Rosen­berg of in­vest­ment man­agers Gluskin Sh­eff has said deficits of C$50 bil­lion are ap­pro­pri­ate in this slow-growth en­vi­ron­ment. A C$30 bil­lion deficit is equal to just 1.5 per­cent of gross do­mes­tic prod­uct, a level most gov­ern­ments would gladly take. The U.S. bud­get gap was al­most twice that last year, ac­cord­ing to the Con­gres­sional Bud­get Of­fice. Canada’s debt, at about 31 per­cent of GDP, re­mains among the low­est for Group of Seven na­tions, giv­ing Trudeau room to ap­ply stim­u­lus to the strug­gling econ­omy.

His mid­cam­paign prom­ise to run deficits to spark growth sep­a­rated him from his op­po­nents. Cana­di­ans have been leery of deficits since ex­pe­ri­enc­ing a quar­ter-cen­tury of them, be­gin­ning with Trudeau’s father. Af­ter a painful ad­just­ment in the mid-1990s, Canada ran sur­pluses un­til the Great Re­ces­sion. For­mer Prime Min­is­ter Stephen Harper staked his eco­nomic bona fides on re­turn­ing the bud­get to bal­ance in the runup to the elec­tion, but vot­ers pre­ferred Trudeau’s pledge of more in­fra­struc­ture spend­ing to boost the econ­omy.

Most of the gap for this year re­flects plung­ing govern­ment rev­enue, not Trudeau’s am­bi­tious spend­ing plans. Canada is in tran­si­tion as it seeks more sources of growth amid the com­modi­ties de­cline. Among Trudeau’s tasks is re­plac­ing the part of GDP that’s dis­ap­peared since 2014. “The econ­omy has been hit by the drop in en­ergy sec­tor cap­i­tal spend­ing, which in 2014 was worth about 3 per­cent of GDP and is in the process of fall­ing to half that level,” says Avery Shen­feld, chief econ­o­mist at the Cana­dian Im­pe­rial Bank of Com­merce. A gray­ing pop­u­la­tion and slow pro­duc­tiv­ity growth make it harder to re­store that lost 1.5 per­cent of GDP.

Al­though many of Canada’s econ­o­mists have no trou­ble with the ex­tra spend­ing, at some point re­straint will be nec­es­sary. “The fi­nance min­is­ter’s job in ev­ery govern­ment—and she or he may not rel­ish it, but it’s the job— is to say no, and Bill Morneau doesn’t seem to have said no to much yet,” says Bill Rob­son, pres­i­dent of the C.D. Howe In­sti­tute, a non­par­ti­san think tank in Toronto, of which Morneau is a for­mer chair­man. “The sooner the day comes when he says no, the bet­ter off we will be in the long run.”

The bot­tom line Canada’s un­ex­pected bud­get deficit still leaves room for more govern­ment spend­ing to boost the econ­omy.

Newspapers in English

Newspapers from Bahrain

© PressReader. All rights reserved.