Bud­get: Morneau ex­pected to play it safe

Trudeau govern­ment set to ta­ble mod­est bud­get amid U.S. un­cer­tainty

The Niagara Falls Review - - NATIONAL - ANDY BLATCH­FORD


OT­TAWA — The Trudeau govern­ment will chart the next seg­ment of its man­date this week in what’s ex­pected to be a mod­est bud­get — but the om­nipresent eco­nomic un­knowns in the U.S. could even­tu­ally force Ot­tawa from a steadyas-she-goes course.

For now, the stronger U.S. econ­omy is ben­e­fit­ing Canada. Fi­nance Min­is­ter Bill Morneau will present the coun­try’s bud­get Wed­nes­day amid a bright­en­ing out­look, thanks in large part to the United States.

In re­cent months, health­ier Cana­dian num­bers — from trade, to labour, to hous­ing — have en­cour­aged fore­cast­ers to raise their pro­jec­tions for eco­nomic growth.

Some be­lieve these im­prove­ments will put Ot­tawa on a path to­ward smaller an­nual deficits than what the govern­ment had pre­dicted last fall. Af­ter a sur­pris­ingly ro­bust fin­ish to 2016, Ot­tawa’s an­tic­i­pated $25.1-bil­lion short­fall for 2016-17 is widely ex­pected to come in less than pro­jected.

In nor­mal times, the mod­est mo­men­tum would pro­vide a dose of op­ti­mism for a govern­ment draw­ing up its bud­get.

But Canada’s cur­rent eco­nomic cli­mate is far from typ­i­cal.

The Novem­ber elec­tion win for U.S. Pres­i­dent Don­ald Trump has led to sig­nif­i­cant un­cer­tainty in what is by far Canada’s top trad­ing part­ner.

Even with the re­cent eco­nomic im­prove­ments, there are wide­spread con­cerns in Canada about U.S. pro­pos­als, in­clud­ing dis­cus­sion about ma­jor changes to trade and tax poli­cies.

Many warn the changes, which could in­clude a bor­der ad­just­ment tax, could have se­vere eco­nomic con­se­quences on this side of the bor­der.

For now, with so many un­knowns, sources have said Ot­tawa has no plans to take steps in the bud­get to di­rectly ad­dress the Trump-re­lated eco­nomic fears.

It re­mains to be seen whether Ot­tawa will have the flex­i­bil­ity to re­spond to any changes im­ple­mented in the U.S. over the course of the year.

“The govern­ment is build­ing this year’s bud­get with not a great deal of clar­ity about the geopo­lit­i­cal risks that could im­pact the Cana­dian econ­omy,” said Craig Alexan­der, chief economist for the Con­fer­ence Board of Canada.

“And so, they might want to be sen­si­tive to that and they might want to de­lay some of the mea­sures they were think­ing about un­til they ac­tu­ally have greater clar­ity about what’s hap­pen­ing south of the bor­der.”

In­deed, ma­jor spend­ing de­ci­sions on de­fence and in­ter­na­tional aid seem to have been de­ferred to later this year.

Even be­fore any con­crete eco­nomic moves by Trump, the U.S. resur­gence has had neg­a­tive ef­fects in Canada.

A re­search note by TD last week said U.S. rate in­creases have al­ready started to push up Cana­dian mort­gage rates, cre­at­ing “sig­nif­i­cant risk” in an econ­omy with high house­hold debt and soar­ing real es­tate prices.

Higher U.S. in­ter­est rates since Trump’s vic­tory could also lead to big­ger debt pay­ments for Ot­tawa in the future, though some econ­o­mists be­lieve the ef­fects will be off­set by the ben­e­fits for Canada from a grow­ing Amer­i­can econ­omy.

At the same time, Ot­tawa faces tight fis­cal con­straints and it’s ex­pected to de­liver a slim bud­get with few big-ticket items.

The Lib­er­als have al­ready com­mit­ted to ma­jor spend­ing in­creases for in­vest­ments over the com­ing years in ar­eas like in­fra­struc­ture and ex­panded child ben­e­fits, which they ar­gue will help lift the econ­omy over the long haul.

The Trudeau govern­ment’s out­look is pre­dict­ing sev­eral years of dou­ble-digit deficits.

The Lib­er­als aban­doned their elec­tion pledge to run an­nual short­falls of no more than $10 bil­lion over their man­date and to bal­ance the books in four years.

In­stead, Morneau has pledged to re­duce the debt-to-GDP ra­tio — also known as the debt bur­den — be­low its cur­rent level by 2019-20.

But stick­ing with the vow on the debt-to- GDP ra­tio means Morneau has very lit­tle “wig­gle room” when it comes to new spend­ing, says Ran­dall Bartlett, chief economist at a Univer­sity of Ot­tawa think tank.

He be­lieves the govern­ment should do more to an­a­lyze the per­for­mance of these in­vest­ments to en­sure Cana­di­ans are get­ting bang for their buck.

“The ques­tion is, are we just ba­si­cally spend­ing money like drunken sailors?” said Bartlett, whose In­sti­tute of Fis­cal Stud­ies and Democ­racy is di­rected by for­mer par­lia­men­tary bud­get of­fi­cer Kevin Page.

But with­out ac­count­ing for U.S. pol­icy changes — since they re­main un­knowns — Bartlett be­lieves the stronger econ­omy has put Ot­tawa on track to shave a few bil­lion dol­lars off each of its pro­jected deficits from 2016-17 to 2018-19.

Ques­tions have been raised by Morneau’s de­ci­sion to base his up­com­ing bud­get’s pro­jec­tions on fore­casts he re­ceived from pri­vate-sec­tor econ­o­mists in midJan­uary.

The Fi­nance De­part­ment tra­di­tion­ally uses a sur­vey of pri­vate­sec­tor fore­cast­ers to de­ter­mine its base­line pro­jec­tions, but those num­bers are usu­ally de­liv­ered only a few weeks prior to the bud­get.

Bartlett be­lieves the econ­omy has im­proved so much since Jan­uary that the govern­ment will have a need­lessly pes­simistic fore­cast un­der­ly­ing the bud­get num­bers — which would make it eas­ier for Ot­tawa to beat these lower fis­cal ex­pec­ta­tions down the road.

Sco­tia­bank chief economist JeanFran­cois Per­rault, a for­mer as­sis­tant deputy min­is­ter un­der Morneau, said he doesn’t be­lieve the eco­nomic pro­jec­tions for Canada have im­proved enough since Jan­uary to make a big dif­fer­ence.

Per­rault is pre­dict­ing slightly big­ger an­nual deficits over the com­ing years. He said it’s partly due to higher-than-ex­pected govern­ment spend­ing and his ex­pec­ta­tion the govern­ment will rein­tro­duce its $3-bil­lion yearly risk ad­just­ment.

“We have a fis­cal path in Canada that has rea­son­ably high deficits for a pretty sig­nif­i­cant pe­riod of time,” said Per­rault, who added that the feds are in good fis­cal shape and he’s not im­me­di­ately con­cerned about the string of short­falls.

But he noted that when Ot­tawa does take steps to re­turn to bal­ance it will need “pretty sig­nif­i­cant” spend­ing cuts and tax in­creases to make it hap­pen.

Per­rault said it’s tech­ni­cally pos­si­ble the econ­omy will grow enough be­fore the end of the Lib­eral man­date to elim­i­nate the deficit on its own — with­out tax hikes and spend­ing re­duc­tions. But he added such a sce­nario is “far fetched.”

And when it comes to ad­dress­ing the U.S. un­cer­tainty, Per­rault said Cana­di­ans could see Ot­tawa make its big pol­icy moves in the 2017 fall eco­nomic state­ment or even in next year’s bud­get.


Min­is­ter of Fi­nance Bill Morneau and the Fed­eral govern­ment will present the coun­try’s bud­get on Wed­nes­day. Sources have said Ot­tawa has no plans to take steps in the bud­get to di­rectly ad­dress the Trump-re­lated eco­nomic fears.

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