Justin Trudeau tries deficit spending to jolt Canada’s economy

A shortfall in tax revenue and extra spending drive up the deficit “He’s in the honeymoon phase still a little bit”

A fading Canadian economy is putting Justin Trudeau’s optimism to the test. On Feb. 22 growth projections for 2016 were lowered from 2 percent to 1.4 percent. Canada’s dollar fell almost 10 percent against the greenback in Trudeau’s first 11 weeks in office. Now his finance minister has previewed the March 22 budget by revealing that the deficit will be higher than Trudeau’s Liberal Party anticipated.

All three of the commitments Trudeau gave during the autumn campaign to quell concerns about his fiscal management are falling by the wayside. He pledged the budgetary shortfall would be no more than C$10 billion ($7.3 billion) a year. Minister of Finance Bill Morneau is signaling that the figure will be closer to C$30 billion ($22 billion) once campaign promises are factored in. That will make it unlikely that Trudeau can fulfill his other two commitments: to balance the budget by 2019 and keep decreasing the national debt as a share of the economy.

Despite all the negative economic news, driven in large part by the collapse of oil prices, the rookie leader and son of former Prime Minister Pierre Trudeau is more popular than ever. Deficits “won’t hurt his numbers until there’s some economic event that actually affects people’s daily lives,” such as layoffs or another plunge in the dollar, says Toronto pollster Lorne Bozinoff of Forum Research. A poll in February found support for Trudeau’s party at 49 percent, up from 39 percent on Election Day in October. “He’s in the honeymoon phase still a little bit,” says Bozinoff. “He’s got that, but he’s got to now start to really deliver.”

Many of Canada’s foremost economists back deficit spending. Economist David Rosenberg of investment managers Gluskin Sheff has said deficits of C$50 billion are appropriate in this slow-growth environment. A C$30 billion deficit is equal to just 1.5 percent of gross domestic product, a level most governments would gladly take. The U.S. budget gap was almost twice that last year, according to the Congressional Budget Office. Canada’s debt, at about 31 percent of GDP, remains among the lowest for Group of Seven nations, giving Trudeau room to apply stimulus to the struggling economy.

His midcampaign promise to run deficits to spark growth separated him from his opponents. Canadians have been leery of deficits since experiencing a quarter-century of them, beginning with Trudeau’s father. After a painful adjustment in the mid-1990s, Canada ran surpluses until the Great Recession. Former Prime Minister Stephen Harper staked his economic bona fides on returning the budget to balance in the runup to the election, but voters preferred Trudeau’s pledge of more infrastructure spending to boost the economy.

Most of the gap for this year reflects plunging government revenue, not Trudeau’s ambitious spending plans. Canada is in transition as it seeks more sources of growth amid the commodities decline. Among Trudeau’s tasks is replacing the part of GDP that’s disappeared since 2014. “The economy has been hit by the drop in energy sector capital spending, which in 2014 was worth about 3 percent of GDP and is in the process of falling to half that level,” says Avery Shenfeld, chief economist at the Canadian Imperial Bank of Commerce. A graying population and slow productivity growth make it harder to restore that lost 1.5 percent of GDP.

Although many of Canada’s economists have no trouble with the extra spending, at some point restraint will be necessary. “The finance minister’s job in every government—and she or he may not relish it, but it’s the job— is to say no, and Bill Morneau doesn’t seem to have said no to much yet,” says Bill Robson, president of the C.D. Howe Institute, a nonpartisan think tank in Toronto, of which Morneau is a former chairman. “The sooner the day comes when he says no, the better off we will be in the long run.”

−Josh Wingrove

The bottom line Canada’s unexpected budget deficit still leaves room for more government spending to boost the economy.

of the European Union Chamber of Commerce in China, at a press conference in Beijing on Feb. 22, where a chamber report on excess capacity was released. That report’s conclusion: “The Chinese government’s current role in the economy is part of the problem,” while overcapacity has become “an impediment to the party’s reform agenda.”

Many of the unneeded mills, smelters, and plants were built or expanded after China’s policymakers unleashed cheap credit during the global financial crisis in 2009. The situation in steel is especially dire. China produces more than double the steel of Japan, India, the U.S., and Russia— the four next-largest producers— combined, according to the European Union Chamber of Commerce. That’s causing trade frictions as China cuts prices. On Feb. 12 the EU announced it would charge antidumping duties of as much as 26.2 percent on imports of Chinese non-stainless steel.

Steel mills are running at about 70 percent capacity, well below the 80 percent needed to make the

operations profitable. Roughly half of China’s 500 or so steel producers lost money last year as prices fell about 30 percent, according to Fitch Ratings. Even so, capacity reached 1.17 billion tons, up from 1.15 billion tons the year before.

With about one-quarter of China’s steel production coming from Beijing’s neighboring province of Hebei, excess production is a major contributor to the capital’s smoggy skies. And with average steel prices likely to fall an additional 10 percent in 2016, fears of spiraling bad debts are growing. A survey released in January by the China Banking Association and consulting firm PwC China found that more than four-fifths of Chinese banks see a heightened risk that loans to industries with overcapacity may sour.

In December, Premier Li Keqiang warned that money-losing industrial “zombie companies” are wasting scarce resources and must be shuttered. In February, China’s State Council announced plans to eliminate up to 150 million tons of steel production in five years and said

regulations will be loosened to speed up mergers and acquisitions in steel and other industries. China will “actively and steadily push forward industry and resolve excess capacity and inventory,” the People’s Bank of China said on Feb. 16 after a meeting with the National Development and Reform Commission, the banking regulatory commission, and other agencies.

The government may find it hard to achieve that goal. The steel industry will lose as many as 400,000 jobs as excess production is shuttered, Li Xinchuang, head of the China Metallurgical Industry Planning and Research Institute, predicted in January. Hebei and the industrial northeastern provinces of Heilongjiang, Jilin, and Liaoning, home to much of China’s steel production, don’t have lots of jobcreating companies to absorb unemployed steelworkers. “They are concerned about the possibility of social unrest with workers’ layoffs,” says Peter Markey, Shanghai-based China and Mongolia mining and metals leader at consultants Ernst &