ROSY FISCAL UPDATE?
Challenges yet to come: Ivison
The Liberal government released its fall fiscal update Wednesday, making the bold preelection claim that the land is strong — even if it may not feel that way if you’re trying to sell a house or work in the oilpatch.
In fairness things are going pretty well, on the back of surging demand from the U.S. But there appears to be a supreme confidence that it will be ever thus. Scant provision is being made for the recession rumbling toward us inexorably, like a winter storm.
The government gave itself a clean bill of health, pointing out GDP growth is forecast at two per cent for the next two years, before slowing to a still respectable 1.6 per cent.
Unemployment is forecast to be below six per cent over the next two years, while the federal debt-to-GDP ratio is predicted to continue to tick downward.
The government concluded its re-election pitch by claiming it has fulfilled a third of its mandate promises, with “progress made” on the other two-thirds.
For a government heading back to the polls next year, it is, at first blush, a solid base from which to launch a campaign for another mandate.
Finance Minister Bill Morneau said Wednesday that a middle-class family of four is now $2,000 better off, thanks mainly to the Canada Child Benefit.
When it comes to specific measures the fall update, given the title “Investing in Middle-class Jobs,” is a modest document, with much to be modest about.
But it did introduce a number of measures aimed at addressing U.S. President Donald Trump’s corporate tax cuts, including tax incentives to encourage businesses to invest in new assets like machinery and equipment.
The new plan will “give Canadians the help they need to succeed, making smart investments to grow our economy for the longterm, while we bring the books back towards balance,” Morneau said — the first time anyone can remember a Liberal finance minister talking about balanced budgets since the days of Paul Martin, the deficitslayer.
On the basis of the spin, were an election held tomorrow there would be lineups at the polling booths to laud the Liberals for their incredible feats of economic alchemy.
Needless to say, while the fiscal update tells the truth it doesn’t tell the whole truth.
Tax revenues for the first six months of the fiscal year were up 10 per cent, or a whopping $13 billion, but growth is patchy. The housing market — for so long a driver of economic growth — has recorded three quarters of contraction.
HELP ... WHILE WE BRING THE BOOKS BACK TOWARDS BALANCE.
The oilpatch appears to be going through something of an existential crisis, as jobs and investment continue to bleed south of the border. In the Financial Post this week, former Encana CEO Gwyn Morgan noted with alarm how his former company has “exported” itself to the U.S. He blamed Justin Trudeau and the Liberal government for a litany of bad policy decisions — from the oil tanker ban, to killing the Northern Gateway pipeline; from the introduction of “upstream emissions” in pipeline regulatory hearings to bill C-69, the impact assessment act — that has all but killed Canada’s most economically important industry.
The fall update offers little in the way of comfort for producers, or for Alberta’s provincial government, faced as they are with a price differential that is reaching record highs.
What it does contain is a range of tax changes to encourage business investment in Canada. Arguably, the measures should have been included in the spring budget, flush from the windfall of three-per-cent growth in2017.
But since business investment and exports will be relied on to make a greater contribution to economic growth, it is timely that the Liberals have finally acknowledged that the golden goose won’t keep laying without some encouragement. This has not been a government overly concerned with wealth generation during its first three years in office.
Business groups had called for Morneau to reduce the corporate income tax rate across the board but the finance minister deemed his room for manoeuvre was limited, given the need to keep the “fiscal anchor,” the debt-to-GDP rate, ticking down. The new measures will cost $14 billion over the next five years, so this is not chump change. But the money appears to be targeted, since it allows Canada to market itself as the lowest marginal effective tax rate (METR) in the G7.
For many international companies, it is the METR, the cumulative rate of taxes that affect businesses, that is a key determinant of where they will invest.
It is a creative solution that will help businesses write off assets in a range of industries at a faster rate — including intangibles like computer software — even if it doesn’t address the specific problems facing the oil industry.
At the very least, it is “investment” that may have a productive outcome — unlike many of the tax dollars that have been tossed hither and thither in the past three years. You only get it if you invest.
The real problem is that, for all the “confidence in Canada’s economic future” the document expressed, a downturn is coming as surely as winter follows fall.
When it does, the debtto-GDP ratio will not keep falling, because GDP will shrink. That is when a reckoning will take place.
The measures announced in the fall update will add to a deficit that is set to remain in double figures as far out as the Department of Finance projects.
The much-vaunted $2,000-a-year bonanza for the family of four is paid for with borrowed money. It is not just Conservatives who see that as a “raid on future generations.”
For all the billions being added to the national debt, the benefits are not being felt by everyone.
These are the good times but for many people, they don’t feel that good. The government boasts about rising wages but for the past three years, real wages averaged gains of just 0.3 per cent, versus one per cent for the previous decade.
Rising interest rates are also making life tougher.
But there is none of this nuance in the sunny days document tabled by the government. In a self-assessment of their own brilliance, the Liberals judged their commitment to balance the budget by 2019-20 as a measure where action has been taken and “progress made,” even if, sadly, it is “facing challenges.”
That blatant nose-stretcher comes just 25 pages after the summary statement of transactions that says the deficit in 2019-20 will be $19.6 billion. Some progress, some challenge.
The entire document should come with a warning sticker: “Caution — stormy objects in your mirror are closer than they appear.”
THE $2,000-A-YEAR BONANZA FOR THE FAMILY OF FOUR IS PAID FOR WITH BORROWED MONEY.