Morneau mulls new budget cushion

OTTAWA • Finance Minister Bill Morneau is considering reintroducing a risk cushion as he prepares Canada’s next federal budget amid economic uncertainty driven in part by the Trump administration, according to people familiar with his plans.

Canada’s budget has typically included wiggle room, either by using low-ball growth forecasts or by actually budgeting a line-item cushion. Prime Minister Justin Trudeau’s government did the former in its first budget, before eliminating the practice in its November economic update.

In a move that would inflate deficit forecasts, the government is now considering reinstating some form of cushion because of several risk factors including U.S. president-elect Donald Trump, said three people who spoke on condition of anonymity because the decision hasn’t been finalized.

Morneau was asked last week what contingencies, if any, he would put in place amid uncertainty over Canada-U.S. trade. “We are looking forward to working with the new administration,” Morneau said, later adding government would “be careful to ensure we have the capacity to deal with the environment we find ourselves in.”

Trudeau’s team is facing sluggish growth as the country continues to limp through the oil price shock. Deficit projections of about $115 billion over the next five years are more than four times what Trudeau campaigned on in 2015. The government doesn’t forecast a return to balance, instead saying it will use the country’s debt ratio as a fiscal anchor.

Before Trump’s victory, Morneau said he did away with the cushion because risks were “more balanced,” adding he would consider reintroducing it if required.

Morneau met economists in Toronto on Friday as he and his team prepare the budget, due in the coming few months. Uncertainty in Trump’s policies, and when they will take effect, cloud the outlook. Trump has pledged to renegotiate the North American free-trade agreement and threatened the auto industry with a border tax.

Brett House, deputy chief economist with the Bank of Nova Scotia, was among the economists. In an interview afterward, he said the U.S. economy was already picking up steam through the end of 2016. Scotiabank’s forecasts have incorporated only minor impacts of immediate fiscal stimulus and regulatory overhaul from Trump.

Some of Trump’s policies could create competitive disadvantages for Canada, said Craig Alexander, chief economist for the Conference Board of Canada. Alexander, who also attended the Morneau meeting, and House each said they want the government to reintroduce a risk adjustment.

“I think that Trump’s presidency creates additional uncertainty related to the U.S. outlook, because we simply don’t know what this new administration is going to bring,”Alexander said.