Balanced- budget bill ‘ symbolic’: experts
Economists say similar provincial acts were changed or abandoned
Finance Minister Joe Oliver announced what economists called largely “symbolic” legislation Wednesday that would require the federal government to keep a balanced budget in prosperous years.
The proposed bill will be tabled this month and comes as Oliver prepares to unveil the first balanced budget from the Harper government in eight years. That announcement is expected to take place on April 21.
Oliver is under pressure to balance Canada’s budget at a time when a collapse in oil prices has threatened to stall the country’s economy.
The federal budget was originally set to be delivered in March, but was delayed to buy the government time to adjust to the more than 50- per- cent price decline in the oil market.
“The crisis is over, and so is the time for deficit- creating stimulus spending,” Oliver said during his speech to the Economic Club of Canada in Toronto.
Slowing economic indicators have called into question the sustainability of a balanced budget this year. Statistics Canada said gross domestic product shrank by 0.1 per cent in January, weighed down by a retreat in wholesale and retail sales.
The Bank of Canada surprised the market in January by cutting its benchmark interest rate by 25 basis points to 0.75 per cent, warning that the oil price crash threatened Canada’s resource- dependent economy and that “insurance” was required to prevent a recession.
GDP has declined in two of the past three months.
Some foreign investors have been losing confidence in Canada. Last month, the world’s largest bond fund, Pacific Investment Management Co. said it was exiting its position in federal bonds.
Robert Kavcic, vice- president and senior economist for BMO Capital Markets, said while the bill looks good on paper, it would likely have no noticeable impact on the confidence of foreign investors.
“I think confidence at the federal level in Canada’s credit is high enough, so I don’t think it’s going to change that,” he said. “If there are issues in Canada fiscally, they’re more at the provincial level than the federal level.”
The idea of balanced budget legislation isn’t new in Canada. It was first adopted by the B. C. Social Credit Party in 1991 and seven other provinces followed in subsequent years by introducing their own balanced budget rules.
Kavcic said that he did not expect the legislation to have a significant impact on future budgets, given the provincial examples.
“At the end of the day it didn’t do a whole lot, because most of the provinces either amended or scrapped their legislation after the financial crisis,” he said.
The Conservatives originally pledged to introduce the bill in 2013, and the proposed legislation appears to follow many of the suggestions made by a report from the Parliamentary Budget Officer last September.
The bill was predictably well received by business groups Wednesday, including the Chartered Professional Accountants of Canada, which said the legislation would help create a “culture of fiscal prudence.”
While the proposed bill aims to prevent deficits, it will allow the federal government to run a deficit in the event of a recession or “extraordinary circumstance,” such as a war or natural disaster, with a cost exceeding $ 3 billion in a year.
If the federal government is forced to go into deficit, the Finance minister will be required to testify before the House of Commons Committee on Finance within 30 days and present a timeline when the government would return to a balanced budget.
Also included in the proposed bill is a five- per- cent pay dock for cabinet ministers if the government fails to balance its books within a given timeline.
“We would propose that if a Finance Minister posts a deficit outside of these extraordinary circumstances, an automatic operating freeze would go into effect,” Oliver said.
Most of the provinces either amended or scrapped their legislation after the financial crisis.