Proceed with caution
Economists to push for fiscal restraint in pre-budget meeting with Morneau
With so much uncertainty surrounding trade and competitiveness, private-sector economists will press Finance Minister Bill Morneau to keep his fiscal powder dry when they gather later this week for a pre-budget meeting.
Morneau is scheduled to sit down on Friday in Toronto with leading economists at a roundtable that typically includes about a dozen experts from commercial banks, think tanks and trade associations.
Finance ministers routinely call on outside economists for input and forecasts as part of the budget-writing process. Their projections are averaged to create a fiscal foundation for the budget, which could come as early as this month.
Some economists say that late2017 improvements in the economy will likely give Morneau more fiscal elbow room in the budget, compared to his October update.
Others are less optimistic about the changes in recent months and expect the government to find itself in a similar budgetary position.
But regardless of the fiscal footing, there’s agreement that the government should proceed with caution. They want Ottawa to make sure it is ready for the stillunknown impacts of the drawnout renegotiation of the North American Free Trade Agreement and the U.S. move to slash corporate taxes.
“Those are definitely the big two — there’s no question about it — and the kind of chill that that could potentially put on the business investment climate in Canada,” said BMO chief economist Doug Porter, whose colleague will attend the Morneau meeting in his place. “That’s a tough twosome to deal with.”
Last month, the Bank of Canada highlighted the widening negative impacts of NAFTA’S uncertain future. The bank not only made a point of emphasizing the potential effects on trade but also the potential damage on business investment caused by uncertainty itself.
The central bank estimated trade uncertainty would lower investment by two per cent by the end of 2019. It said new foreign direct investment into Canada had tumbled since mid-2016 — a possible consequence of the unknowns around trade.
The bank also warned that lower corporate taxes in the U.S. could encourage firms to redirect some of their business investments south of the border.
Business associations fear the U.S. tax changes could end up inflicting more damage on the Canadian economy than the possible termination of NAFTA.
Morneau’s office has responded to the concerns by arguing that Canada has advantages such as an educated workforce and still boasts a competitive tax rate among G7 countries, even after the U.S. reforms. Ottawa is carefully assessing the U.S. tax changes and will take time to fully understand their potential impacts, his office said in a recent statement.
Scotiabank chief economist Jean-francois Perrault said he doesn’t think the corporate tax changes in the U.S. will have a major impact on Canada — but he admits they could.
Perrault, who will attend Friday’s meeting with Morneau, recommends the government hold off on any big spending plans just in case it needs to respond with tax measures of its own to keep Canada competitive.
“It would be very prudent for the government to wait until we see if, in fact, there is evidence that what’s happening down south in the U.S. is having a detrimental effect on Canadian business,” Perrault said.
Heading into the budget, he thinks the solid economy has given Morneau more fiscal space than he had in the fall.
In October, Morneau’s fall fiscal statement predicted a deficit of $18.4 billion in 2017-18 and a $15.6-billion shortfall in 2018-19.
Perrault, a former assistant deputy minister under Morneau, said he now expects Ottawa to be on track for deficits of $16.8 billion in 2017-18 and $14.8 billion in 2018-19.