Morneau’s deficits ballooning before Liberal spending promises hit
The research is conclusive – the average short-term memory of animals is 27 seconds. Even dogs only retain information for two minutes.
But the human capacity for memory means most of us can remember back days, months, even years in some cases. Someone might want to tell Finance Minister Bill Morneau.
The brighter lights out there will recall we recently had a general election, during which the Liberal Party made spending commitments totalling $56.7 billion over four years. Yet, those measures were conspicuous by their absence in Monday’s fiscal update — despite the deficit being $7 billion higher than was forecast in the spring budget.
Morneau boasted about economic growth that will likely see Canada come second in the G7 next year; about historically low unemployment numbers, and wage growth that is outpacing inflation.
The finance minister wants Canadians to know that he and his colleagues are good fiscal managers who will continue to reduce the net debt to GDP ratio to make sure the economy is “strong and resilient” in the event of a downturn. At some point, Morneau seems destined to be faced with the fiscal equivalent of Sophie's Choice.
It was only after he had finished his epistle that reporters burst his bubble. Apart from the campaign promise to raise the basic personal exemption (accounting for $18 billion of the $57 billion in new spending over the next four years), there was no mention of the commitments made to Canadians during the election.
Rising deficits are putting
pressure on the only fiscal anchor to which the government pays lip-service – the debt-toGDP ratio – even before the risk of slowing growth in the economy impacts the denominator (in fact, the ratio will increase marginally in the current year, illustrating how little room for manoeuvre Morneau has).
But, and this is the point that might upset those big brains who can think back eight weeks or so, that is before the Liberals fulfill the remaining $6 billion of campaign commitments in the coming fiscal year, not to mention the $10 billion every year after that. At some point, Morneau seems destined to be faced with the fiscal equivalent of Sophie’s Choice – ditch the debt-to-GDP fiscal anchor or renege on the commitments on which his government was elected.
Far back in the mists of ancient time – roughly mid-September – Justin Trudeau said, if re-elected, he would bring in more affordable child-care, make post-secondary education more affordable, increase Employment Insurance benefits, raise Old Age Security payments, make homes more energy efficient and teach young immigrants how to camp. Then there’s pharmacare.
It is too early to talk about broken promises – at least from this election platform – but looking at this fiscal update, it is hard to see how Morneau can do any of that and also live up to the prime minister’s demand, made in the mandate letter released last week, that he “continue to reduce the government’s debt as a function of its economy.”
“Nobody said it was going to be easy,” the finance minister joked, in a moment of dizzy candour.
Morneau remained doggedly cheerful, pointing out that all 14 private sector economists whose forecasts form the basis for growth projections are relatively optimistic. “All 14 are projecting growth. None are projecting a recession,” he said.
Still, the spectre remains, as Trudeau acknowledged in Morneau’s mandate letter when he urged the finance minister to “preserve fiscal firepower” in the event of a downturn. The horse would appear to have bolted on that one.
Even in the spring budget, there was a sense that deficits were under control, coming in under $10 billion by the end of the cycle in 2023/24. This projection has the budget $16.3 billion in the red that year – and that’s before the additional $10 billion in spending anticipated in the Liberal platform.
Perhaps the most dispiriting graph in the new fiscal update charts real business investment. It shows that investment in Canada has fallen 10 per cent in the past four years, even as business spending in competitor countries like the U.S., the U.K., and Germany has risen by a similar amount.
Lower investment means slower economic growth and wasted economic potential. The Liberal government did introduce tax incentives in last year’s fall statement. The update projects corporate income tax revenues will fall seven per cent this year, so businesses are availing themselves.
But Canada is clearly not a magnet for capital. If public debt accumulation is not yet at an unsustainable rate, it is also the case that this country is not invulnerable to being sideswiped by events from beyond its borders.
There are probably only a handful of people left whose memories extend as far back as 1995, when the Mexican peso crisis put the Canadian dollar under downward pressure and forced a sharp rise in interest rates, as investors demanded a risk premium.
Let’s hope Bill Morneau is one of them, and that if he is faced with an unpalatable decision, he chooses wisely.