Budget could have been bolder

Canada ran deficits far larger back in 1984

From my standpoint, t he Liberals could have been a lot bolder in their budget.

Much is made of the $ 29- billion deficit number but the economy had been so soft that the gap would have been about half the planned level had Ottawa done nothing. In other words, half the deficit was due merely to the soft economic backdrop.

At l east capital- gains taxes and employee stock option benefits were not capped and there were tax incentives for liquefied natural gas (via a preferential capital cost allowance rate on new investment).

Considering that the government could have gone all the way to $ 50 billion on deficits just to get the deficit- to- GDP ratio where it is in the U.S ., and half what the average is for the G7, $ 29 billion ( 1.5 per cent of GDP) is small potatoes.

We ran deficits far larger than that in 1984 — the third year of a huge recovery — when the economy was one- quarter the size it is today.

Besides, debt-service charges are coming down at a five- per- cent annual rate, to their lowest level in three decades, and this gives the government even more latitude. Far from being a typical Liberal pet- project-filled spending binge, projected program outlays of $ 291 billion barely exceed the $ 288 billion expected revenue stream this year; and those numbers are $305 billion and $ 302 billion, respectively, next year.

So, much of the deficit just reflects interest charges on the debt, not some rampant irresponsible spending spree.

That said, there was no economic rationale, really, to defer the decline in small business tax rates or to even boost top marginal income tax rates, not to mention stemming the planned de- cline in employment insurance premiums.

And t he o nl y factor limiting the ability to engage i n more i nfrastructure spending ($ 12 billion over the next five years is a small dent in an estimated $ 125- billion infrastructure shortfall) is that there apparently are not that many shovel- ready projects in the near-term pipeline. Much of this capital spending, given the long gestation periods, are back-end loaded.

Still, there is enough in this budget to add just over a half- point to baseline real GDP growth for this year — given the new spending and the tax shifts in favour of those households ( students, elderly, low- and middle-class) who spend much more of their incomes than is the case for the upper echelons.

The provinces ( e s pecially in central Canada) are ahead of the game in balancing the books and as such the fiscal tightening at this level is very much in the rear- view mirror — the belt- tightening at the lower levels of government is no longer a constraint on growth and may even provide a bit of a boost going forward based on some of the latest spending estimates.

So the Bank of Canada, the federal government, and private sector economists were close to 1.5 per cent for real growth forecasts this year, but given the stimulus, and what seems to be a decent starting point from the recent slate macro data ( aside from employment), we could see Canada lead the G7 with something closer to 2.5 per cent for 2016.

This takes rate cuts by the Bank of Canada off the table and is a solid underpinning for the Canadian dollar — mean-reversion would imply an eventual test of 80 U. S. cents for the currency in U. S. dollar terms, or $1.25 Canadian ( but this will not be a straight-line).

There is no shortage of critics of the Liberals’ first budget, but there are some pluses. The government did not let the softer revenue base discourage it from giving the economy a boost via deficit finance.

The campaign pledge of deficits for two years and then a return to a balanced budget has been thrown, appropriately, into the waste paper basket. The deficit stays above $ 20 billion into the 2018/19 fiscal year.

This is no biggie, as the debt- to- GDP ratio peaks at 32.5 per cent this coming year ( from 31.2 per cent) which is less than half the prior peaks and still near the low end of the OECD ladder.

And the roughly $ 10 billion of new stimulus, as was pledged, was left intact — a fiscal boost to be sure, but a moderate one.

Compare and contrast t his budget to t he f i rst federal budget in the mid1990s in which the Liberals unveiled a series of popul i st measures ( f rom t he election campaign socialist manifesto at the time called the “Red Book”) that would have left the deficit in 1995 at 5.5 per cent of GDP and net debt at 75 per cent of GDP ( as well as punitive anti- capital gains tax measures) — again, the current group is calling for 1.5 per cent and 32 per cent, respectively, on these budget ratios.

In other words, meet the new Liberals; not the same as the old Liberals ( though the financial markets and a near failed auction in 1995 — the WSJ editorial in Jan. 12, 1995 was titled Bankrupt Canada? — ensured that that inaugural budget in 1994 did not see the light of day).

The fact of the matter is that between the likes of Bill Morneau ( finance minister), Scott Brison ( president of the Treasury Board) and Ralph Goodale ( former finance minister) in the federal cabinet, one can argue that we have at least three fiscal conservatives sitting around the table.