Liberals bow to reality in new budget
Justin Trudeau’s deficit striptease is almost over.
We don’t know exactly what Ottawa’s exact revenue shortfall will be in the coming year. We do know it will be well over the $10 billion Trudeau promised during the election campaign.
We also know that the prime minister and his Liberal government are no longer committed to balancing the books before 2019.
And while Finance Minister Bill Morneau is still promising to eventually reduce the relative size of Ottawa’s debt, it is clear there will be detours along the way.
In announcing all of this a month before his first budget, Morneau is attempting to mitigate any political damage.
It’s always better to get bad news out of the way quickly. Many Canadians (including many Liberals) still view government deficits with grave suspicion.
But in embracing multi-billiondollar fiscal shortfalls, the Trudeau government is also bowing to reality.
Unless it wants to let matters become demonstrably worse, there is little else it can do.
The Liberal government faces problems that are not of its own making.
Nor are they the fault of the previous Conservative regime.
The collapse in world oil prices is beyond Canada’s control. So is the slump in the Chinese, European and Japanese economies.
So, too, is the failure of the U.S. economy to rebound.
Morneau’s fiscal update Monday revealed the dreadful arithmetic: The weakening global economy is expected to reduce Ottawa’s tax revenues by more than $12 billion in 2016-17.
When the cost of Liberal campaign promises to date ($2.3 billion) is added in, the projected deficit for the coming year rises from $3.9 to $18.4 billion. This is without adding in the cost of Trudeau’s priciest campaign pledges.
The government could decide to tackle any shortfall by slashing spending or raising taxes. But as Morneau told a Commons committee Tuesday, to do either when the economy is barely growing risks sending Canada back into recession.
The New Democrats suggest hiking corporate taxes. But even that is no panacea. Corporate profits slump during downturns, as do the taxes levied on them. What is a government to do? Currently, three main ideas are at play among economic policy-makers. Only one has worked.
The first is to reduce the cost of business by reducing taxes and eliminating programs or regulations that keep wages up.
This was the main strategy that Stephen Harper’s Conservatives employed during most of their time in office.
It expressed itself through cutbacks to the unemployed and elderly, as well as the importation of temporary foreign workers.
After failing to sufficiently rejuvenate the stagnant economy, it was disavowed last fall by the voters.
The second idea is to rely on the central bank. Both Canada and the U.S. did this after 2008. The Bank of Canada and the U.S. Federal Reserve slashed interest rates and printed money.
The theory behind these moves was that business would take advantage of low interest rates to invest in job-creating production.
But that didn’t happen — at least not to the extent hoped. Now, even Bank of Canada governor Stephen Poloz says more must be done. Specifically, Poloz is calling on Ottawa to boost the economy by cutting taxes or hiking spending.
And that is the third idea. Stimulus spending used to be associated only with those who viewed themselves as adherents to the economics of John Maynard Keynes. It came back into fashion during the 2008-09 recession (even Harper embraced it briefly). Now it is the new orthodoxy.
Today, the soundest of business economists are calling on Ottawa to run big deficits in order to create valuable infrastructure.
In short, deficit-financing is the new middle ground. It should come as no surprise that this is where the Trudeau Liberals have situated themselves.
The party that used to pride itself on slaying the deficit now prepares to announce a fiscal shortfall that could be in the neighbourhood of $30 billion annually.
Deficit spending on this scale hasn’t been tried since 2009. It worked then. Thomas Walkom’s column appears Wednesday, Thursday and Sunday.