Where have all the good times gone?

Miserable week bodes ill for sunny economic forecast

Remember the good old days — that lost time in your past where you could leave your doors unlocked, everything was cheaper and you’d never had it so good economically? It seems so long ago, but it was just last Tuesday. Since the federal budget was unveiled, the news has been unremittingly bad:

❚ Donald Trump has invoked a national security threat to impose punitive tariff hikes on steel and aluminum;

❚ the loonie has had its worst week in a year;

❚ the TSX is down again (it has lagged the U.S. by 25 per cent over the past 18 months);

❚ GDP growth for the fourth quarter of 2017 came in lower than expected;

❚ foreign direct investment in Canada last year was at its lowest level since 2010;

❚ the latest survey of business confidence by Statistics Canada indicates a further drop in investment, to contribute to a decline that totals 18 per cent since 2014. Maybe Finance Minister Bill Morneau should ask for a do-over and cancel the $32 billion in additional spending that he committed to in last Tuesday’s budget. “The best years are definitely in the rear-view mirror,” said Doug Porter, chief economist at BMO Capital Markets.

The GDP numbers in particular suggest the economy entered 2018 with less momentum than the government anticipated in its budget. BMO has already marked down its full year growth estimate to two per cent from 2.2 per cent. These may sound like small numbers but if the government misses its growth target by half a per cent, that will wipe out the $3 billion contingency cushion built into this year’s deficit.

This budget is not only out of date already, but it is out of step with the concerns of anyone who has taken a close look at Canada’s competitiveness, compared to the United States.

“At this stage of the cycle it was more important to marshal resources and prepare for the heavy weather that’s coming in. But that wasn’t the priority,” said Porter. The Liberals have been sleepwalking their way toward structural deficits that will be hard to reverse, once the bad times bite — such as the decision to index-link the $23-billion Canada Child Benefit.

The government has learned the lesson that it can win on the left and so presents only the fig leaf of prudence in the form of “the lowest debt-to-GDP ratio in the G7.” (A claim that is only true if you discount provincial debt.) But the budget reveals the government is planning to add a further $78 billion of federal debt in the next five years. At the moment, around 8¢ of every dollar of revenue is used for debt repayment (compared with 38¢ in 1990), but that number is set to rise in tandem with interest rates — the budget estimates each percentage point increase in the rate will cost an extra $2.8 billion within five years. The bottom line is that this budget was crafted at the high point of economic conditions in Canada, but at a time when its authors were aware that economic growth was already slowing;

AS THE BAD NEWS CONTINUES, THIS LOOKS INCREASINGLY LIKE AN IRRESPONSIBLE BUDGET.

that there is profound uncertainty over NAFTA; that debt costs are due to rise; and that U.S. tax reform has removed Canada’s advantage on corporate rates. Morneau and his prime minister have had almost nothing to say on any of these subjects.

Yet, rather than using the re-profiling of some infrastructure funds and lower EI payments to reduce the deficit, the money was earmarked for crassly partisan initiatives like $300 million on official languages programs that play well in marginal ridings with large francophone populations outside Quebec.

The Liberals may think they can win on the left, as long as they pay lipservice to fiscal prudence. But, as the deluge of bad news continues, this looks increasingly like an irresponsible budget that should be condemned by reasonable voters of all political stripes.