BETTING ON OPTIMISM
The finance minister focuses on growth to make people feel good, but deficits are the price we must pay, writes Josh Wingrove.
Prime Minister Justin Trudeau headed into the 2015 election pledging three years of modest deficits. It hasn’t panned out that way.
Finance Minister Bill Morneau will release his second federal budget Wednesday and all signs point to more red ink: annual deficits are currently projected in the $22 billion range — the highest since the aftermath of the 2008 downturn — with no forecast return to balance. Some are predicting he’ll have to hike capital gains, or other levies, to keep deficits in check.
But in an era of Brexit and Donald Trump, Morneau sees deficits — driven in Canada by both new spending and a commodities downturn — as something like the price of doing business. Instead, he identifies a different measure of success: making people feel hopeful. And raising taxes or cutting benefits hurts that.
“We talk about middle class ad nauseam and I’m sure it drives journalists crazy,” Morneau said over the weekend in an interview in Baden-Baden, Germany. “But seriously. We look at what’s gone on around the world, is there anybody who questions that we should be focused on how people feel? What are the outcomes if we don’t? So I think we’re going to stay on that message.”
Morneau’s first budget announced new social-program and infrastructure spending that revealed a deficit triple what Trudeau campaigned on. That debut budget forecast a $29 billion shortfall for the 2017-18 fiscal year, or 1.4 per cent of gross domestic product. It also projected government measures would add 0.5 per cent to GDP in 2016-17, and one per cent in the upcoming year.
Morneau’s tenure as finance minister has coincided with more robust growth. The economy expanded 1.4 per cent in 2016, compared with 0.9 per cent in 2015, a challenging year because of the oilprice collapse. Economists predict a 2.1 per cent expansion in 2017.
Over the last two decades, his predecessors have almost invariably pursued surpluses under the governments of Stephen Harper, Paul Martin and Jean Chretien. But Morneau sees economic growth — not a return to balance — as his priority.
“The hallmark of my career to date has been a long-term focus on growth,” he says. Another one is “what are the ways you can deal with people’s confidence in their personal, and family’s, futures? So I focused on pensions, I focused on employee benefit plans, I focused on how people are feeling.”
He’s fighting Canadian orthodoxy. A poll released by the Angus Reid Institute this week found the share of those identifying deficits as a top concern has steadily grown under Trudeau, to 22 per cent from 12 per cent when he took office.
“That fiscal path does matter to a lot of people,” said Bill Robson, president of the non-partisan C.D. Howe Institute think-tank, once chaired by Morneau. Robson said business investment is being dampened by concern over deficits, and that the Trudeau government is saddling young generations with debt after campaigning heavily toward youth.
“I’d love to see something that shows that the finance minister is beginning to exert himself and get some authority around the cabinet table for putting a fiscal track out there that people can sign on to as confidence-inspiring, as opposed to having the bottom line just be the residual after all the spending ministers have had their way,” Robson said.
Morneau has said the budget is aimed largely at innovation and skills training and will stick by his commitment to a declining debt ratio. Morneau also said the budget would have something to say on tax, declining to specify.
Gluskin Scheff & Associates Inc. chief strategist David Rosenberg said in a March 13 research note that he wouldn’t be surprised to see the capital gains inclusion rate rise to 75 per cent, from the current 50 per cent, as part of the Liberal narrative to target the top one per cent. “This promises to be a tax-grab budget,” he wrote.
Rachel Curran, a former policy director to Trudeau’s predecessor, Conservative Stephen Harper, also predicts Trudeau will raise capital gains as part of a “tax the rich” narrative.
“They will use this narrative to increase taxes on Canadians, and they will likely get away with it, which is amazing to me,” Curran said in an interview. “They are coopting that narrative to justify tax increases they have to introduce because they have not been sufficiently disciplined about their spending.”
As minister, Morneau has cut the tax-rate on incomes between about $45,000 and $90,000; hiked taxes on high earners; expanded child-benefit payments, particularly for low-income parents; grown the mandatory Canada Pension Plan program; increased unemployment benefits; and reversed a planned increase to the eligibility age for a key retirement program, Old Age Security, that will cost $11.2 billion per year beginning in 2029, according to one watchdog estimate. For comparison, the country presently spends $18.6 billion annually on defence.
In short, Morneau’s argument is that voter — and consumer — sentiment is a key economic driver that must be propped up at a time when populist forces worldwide threaten globalized trade regimes that Canada relies on.
It’s important that Canadians “have a sense of confidence that they can do better tomorrow than they’re doing today,” Morneau says. If they are, it will boost what he hopes will be his legacy as minister.
“My legacy? I’d like to see a longterm agenda of higher growth than we’d have if we weren’t making investments,” he said. “And I’d like that to be fuelled, in large part, because people feel good about the possibilities for themselves and their families. That confidence will drive more success.”
The hallmark of my career to date has been a long-term focus on growth ... So I focused on pensions, I focused on employee benefit plans, I focused on how people are feeling.