THE PRICE OF PROMISES
DEFICIT CONTROL A CHALLENGE FOR LIBERALS
You could say Finance Minister Bill Morneau’s attempts to consult Canadians over the federal budget got off to a shaky start.
This month, the rookie minister held a Google Hangout with students from universities across Canada for their views on what the budget should contain. The video chat was supposed to be broadcast live online, but those who tried to watch it saw only a black screen.
In Halifax a few days later, the power went out in the middle of Morneau’s budget discussions with local business and community leaders. Candles were brought in.
Preparing for the federal budget in March has produced its share of challenges for the new Liberal government. And the economic and fiscal signs point to more ahead.
Cratering commodity prices, a dipping Canadian dollar, sluggish economic growth and costly campaign promises are proving a mammoth financial headache for the government, and, with Parliament set to resume Monday, could soon be a political one as well.
The cabinet is considering whether to expedite some of its promised infrastructure spending, raising the question of whether a full- blown stimulus program is needed of the sort announced amid the economic crisis of 2009.
Here are the difficult choices Morneau and his colleagues face.
THE REVENUE CHALLENGE
The sputtering economy and sharp decline in commodity prices have torn a massive hole in the federal treasury. Benchmark West Texas Intermediate dipped below US$30 per barrel, the lowest in more than a decade. But the government’s economic update, released in November, had forecast oil prices averaging US$54 per barrel in 2016.
Smaller corporate profits and a painful labour market are eating away at the federal government’s corporate and personal income tax revenues. Job losses also cost the treasury more in employment insurance benefits.
Several economists suggest federal revenues could be potentially $ 5 billion less than forecast for 2016-17, if oil prices remain around $ 30 for most of the fiscal year. “We are facing considerable headwinds,” Morneau admitted during his pre-budget consultations.
The federal government’s fall update projected revenues billions of dollars lower than initially pegged, and a 2015-16 budgetary balance about $5.4 billion worse than forecast in the last budget — before billions of dollars in Liberal promises are even included.
And the 2016-17 budgetary balance is $6.6 billion worse than expected in the last budget (again, before any Liberal spending promises are factored in).
“There’s no question that the revenue growth is going to be weaker than they expected,” said Craig Alexander, vice- president of economic analysis at the C.D. Howe Institute, an economic think-tank.
The Liberals promised during the campaign they would run budget deficits of no more than $10 billion annually over the next few years, then balance the books by 2019-20.
However, some speculate that the federal deficit could hit $20 billion or more in 2016-17 and that the government won’t be able to balance the books in four years.
Some economists believe a deficit in the range of $30 billion would be justified considering the deteriorating economic conditions, although Alexander cautioned that the government must be careful.
“Once you have committed to deficits, it can often be difficult to prevent them from expanding, and this is precisely what we’ve seen happen since the election,” Alexander said.
HOLES IN THE TAX HIKE/ TAX CUT
The Liberals, to some degree, inflicted the revenue pain on themselves.
For instance, their promised middle- class tax cut won’t be fully funded by a tax hike on wealthy Canadians as promised. Instead, the Liberals now say the tax break will leave a $1.2-billion annual fiscal hole. The Parliamentary Budget Officer says it will actually cost the treasury an average $1.7 billion annually between 2016-17 and 202021.
The government initially projected its new tax on the wealthiest one per cent of Canadians would generate close to $ 3 billion annually. However, it has since lowered its revenue projection to about $ 2 billion, which, combined with the tax- cut costing more than initially expected, has the Liberals searching for ways to plug the hole. The PBO says the tax cut will cost $ 3.4 billion in 2016-17 while the tax hike on the wealthy will generate $ 1.8 billion.
All told, the Liberals forecast new revenue of almost $ 24.7 billion in 2016-17 by cancelling several Tory tax breaks and introducing other measures, but new spending is expected to total about $35.2 billion.
REVISITING TORY TAX PLEDGES
The government expects a good chunk of its new revenue, roughly $ 2 billion, to come from cancelling the Conservative government’s income- splitting plan for families with children under 18.
The Liberals also pegged $ 500 million in new revenue in 2016-17, and $6.5 billion over the next four years, from a promised review.
The review includes measures such as “significantly reducing” the federal advertising budget and a sweeping examination of more than $ 100 billion in tax expenditures, such as the various boutique tax credits for items like children’s arts programs, volunteer firefighters and search- and- rescue volunteers.
As well, the government is forecasting it will generate about $ 2.1 billion more annually by 2017-18 by shrinking a planned cut in employment insurance premiums.
The government is also book- ing $725 million in new revenue in 2016-17 and $ 925 million by 201920 by cancelling education and textbook credits, although the cash will be used to boost grants to students.
Also, the Liberals’ pledge to continue phasing out fossil fuel subsidies is projected to save $125 million in 2017-18 and $250 million the following year.
Trudeau’s promise to legalize and regulate marijuana is expected to dump a nice stash of green in federal coffers, with some predicting the federal government could receive more than $ 150 million annually from pot sales.
But the revenue that legalization could bring might not flow for several years.
“I’m sure they’re making some kind of political calculation now to determine how far is too far when it comes to deficits,” said Conservative finance critic Lisa Raitt.
“I think they would like to implement their entire policy platform regardless of the cost associated with it and the deficit that would come as a result, given the economic climate. But they’re not going to be able to do that.”
THE SLIPPERY SLOPE OF SPENDING
The Liberal platform promised more than $ 35 billion in new spending in 2016-17 and about $150 billion in total “new investments” over the next four years.
Some big- ticket items include the middle- class tax cut, new Canada Child Benefit for families, and a promise to double federal infrastructure spending to $ 125 billion over the next decade.
But there are also billions of dollars in key commitments that actually haven’t been fully costed, i ncluding a new federal- provincial health accord and prom- ised measures to combat climate change.
DOUBLING INFRASTRUCTURE SPENDING
The Liberal government’s massive new infrastructure spending is the backbone of its election commitment to run deficits and shift Canada’s sputtering economy into a higher gear.
The government has promised to spend an additional $60 billion on infrastructure over the next decade, double what the Tories pledged.
The promise includes roughly $20 billion more for public transit and another $20 billion for social infrastructure such as affordable housing, seniors’ facilities, and childcare and recreational infrastructure.
The final $ 20 billion in new spending over 10 years will be invested in “greener communities,” including local wastewater facilities.
Less than one-third of the money (about $17 billion) is to be spent in the government’s first four- year mandate. The question is whether the Liberals should spend more, and more quickly.
Kevin Milligan, an economist at the University of British Columbia who was a member of Trudeau’s economic advisory council prior to the election, doesn’t think a widescale stimulus program is needed.
“Six months ago, we couldn’t have predicted where we are today. And now to try to predict where we’re going to be 18 months from now, 12 months from now, it’s very difficult to get the timing right,” Milligan said.
While the labour market in Alberta is struggling, “we’re not in a super-sized recession here (nationally). We’re in a period of slow growth, a period of zero growth, and that’s not great, but you can certainly imagine worse situations,” he said.
“I’ve not even gotten the panic button out of the drawer yet. We’re nowhere close to that.”
CHILD- CARE DOLLARS
The Liberal government’s new Canada Child Benefit is expected to cost $4 billion more than the current system (almost $22 billion annually). Half the costs are expected to be covered by cancelling federal incomesplitting for families with children under 18. The government has not explained the source of the other $2 billion.
SYRIAN REFUGEES
The Liberal pledge that has caught arguably the most public attention — bringing 25,000 Syrian refugees to Canada — may prove to be far more costly than expected. The party’s platform estimated the cost at $100 million in 2016-17, $50 million in 2017-18 and nothing the following two years. The Liberals now put the tally at $ 678 million over six years, with the upfront costs in the first year at least double the estimate.
MISSING WOMEN INQUIRY
The Liberal platform put the cost of an inquiry into murdered and missing aboriginal women at $ 40 million over two years. However, Indigenous and Northern Affairs Minister Carolyn Bennett has since said the $ 40 million “was a placeholder in a platform.” Only after speaking with aboriginal leaders and other Canadians will the government know what the inquiry should look like and what the budget needs to be, she said.
FIGHTER JETS
Trudeau pledged during the campaign that a Liberal government would not purchase the controversial F- 35 stealth fighter jet to replace Canada’s decades- old CF18s because they’re too expensive. The Liberals would instead buy a cheaper option, he said.
Defence Minister Harjit Sajjan has since edged back from that promise, saying his focus is finding the best aircraft through an open procurement process.
RED INK REPERCUSSIONS
It remains to be seen whether Canadians will judge the government harshly if deficits balloon or if it’s unable to balance the books in 2019-20. Canadians want the federal government to keep its fiscal house in order, but many also appear to support opening the treasury to build infrastructure and spur the economy.
It raises a critical political question for Trudeau’s government: do deficits, and the size of them, matter? The government, while backing away from its initial plan to cap annual deficits at $ 10 billion, has vowed to continue reducing the country’s debt as a percentage of GDP (currently around 31 per cent – relatively low compared with other G7 nations), and still says it will balance the budget in 2019-20.
But the more federal finances sink into deficit, the more difficult it will be for the government to pull itself out of the hole.
“It’s hard to gauge whether the government will stick to its commitment to eliminate the deficit in four years’ time, because ultimately it’s about government resolve,” Alexander said. “What you worry about is that if the economy does worse than expected or if there are spending overruns, that the deficit gets even bigger than that, and that’s the slippery slope.”
Raitt says deficits do, indeed, matter, especially during tough fiscal times because — much like household finances — increased debt loads give governments less room to manoeuvre.
However, what’s likely keeping people up at night these days is the soaring cost of groceries and whether they’re going to have a job — not the size of the federal deficit, said Mike Moffatt, assistant professor at Western University’s Ivey Business School.
Moffatt and a number of other economists believe the government could post a deficit of $ 25 billion or more and continue reducing the debt-to- GDP level.
“Canadians have shown that they’re not overly fussed if deficits get larger, if the economy is doing poorly,” he said.