Will Liberals spend more or pay down debt?

At midterm, Liberals lay out financial plans

The Trudeau government, right at the midpoint of its mandate, will map out its financial path this week and announce new measures as it enters the two-year stretch toward the next election.

The fall update will also reveal Tuesday what the Liberals plan to do with an unexpected windfall that experts predict could be as high as $10 billion in each of the next couple of years.

The midterm bump is the product of the strong economic surge in early 2017 that caught forecasters off guard.

Will Finance Minister Bill Morneau seek to use the extra financial breathing room to start grinding down multibillion-dollar deficits?

Or will he pour much of the additional cash into new spending and lingering commitments?

“This is probably the year in which we will get the best possible fix on how committed they are to returning to a path of lower deficits,” said Scotiabank chief economist Jean-Francois Perrault, a former assistant deputy minister under Morneau.

“They’ve got money to spend if they want to spend it. But if they want to send a message of a reasonable degree of fiscal conservatism, it’s also their chance to send that message.”

Without new federal spending, Scotiabank is predicting shortfalls of $17 billion in 2017-18 and $16 billion in 2018-19.

By comparison, Morneau’s budget last March forecasted deficits of $25.5-billion for 2017-18 and $24.4 billion for 2018-19.

A senior government official, speaking on condition of anonymity, said Tuesday’s update will include some new measures — but insisted the document won’t be as thick as last year’s edition.

Last year’s update included major new plans like the government’s $35-billion infrastructure bank, which is designed to use public money as a way to lure private capital for new, largescale projects such as transit systems. It also contained changes to attract a greater number of talented immigrants and to create a hub mandated to lure more foreign investment.

This year, expect the Liberals to share more specifics on how they intend to deliver on big commitments, including those for Indigenous peoples and infrastructure investments, said Sahir Khan, the executive vicepresident of a University of Ottawa think-tank.

Politically speaking, Khan believes the key for the Liberals at this stage of their mandate is for them to start convincing taxpayers that their money is being well spent.

“I do think that as you head into an election, the public starts to think about results and performance, particularly when things are being funded in a deficit context,” said Khan, whose Institute of Fiscal Studies and Democracy is led by former parliamentary budget officer Kevin Page.

Khan’s think-tank is projecting the Liberals’ 2017-18 budget deficit to be more than $10 billion smaller than the government predicted in March.

But beyond next year, the think-tank predicts the feds will struggle to improve the budgetary balance over the next half-decade.

For months, the Liberals have seized on positive economic figures as evidence of progress in their plan to grow the economy through measures such as a tax cut for middle-income earners and enhanced child benefits. The Finance Department also reported last month that the country ran a deficit of $17.8 billion in 2016-17, smaller than the $23-billion shortfall forecast in the spring budget.

Daniel Lauzon, a Morneau spokesman, said the government will make sure that the “middle class sees the benefits” of the improved economy.

Morneau has also been promoting the Liberals’ efforts to address concerns and complaints about a package of proposed smallbusiness tax reforms.

Lauzon said the tax proposals will not be fully costed in Tuesday’s update because more work is needed to finalize the measures, particularly one that calls for new limits on the use of passive investment income by wealthy incorporated individuals. The passive investment change, once implemented, is expected to bring in a significant amount of revenue.

Morneau has credited Ottawa’s deficit-spending approach for the economic improvements and has said he will continue with the plan in a “fiscally responsible way,” which is likely a continued focus on lowering the federal debt-to-GDP ratio.

As the Liberals strategize for the next election, they will also have to consider a major economic threat: the renegotiation and potential collapse of the North American Free Trade Agreement.