Trudeau government set to table modest budget amid U.S. uncertainty

The Trudeau government will chart the next segment of its mandate this week in what’s expected to be a modest budget — but the omnipresent economic unknowns in the U.S. could eventually force Ottawa from a steady-as-she-goes course.

For now, the stronger U.S. economy is benefiting Canada. Finance Minister Bill Morneau will present the country’s budget Wednesday amid a brightening outlook, thanks in large part to the United States.

In recent months, healthier Canadian numbers — from trade, to labour, to housing — have encouraged forecasters to raise their projections for economic growth.

Some believe these improvements will put Ottawa on a path toward smaller annual deficits than what the government had predicted last fall. After a surprisingly robust finish to 2016, Ottawa’s anticipated $25.1-billion shortfall for 2016-17 is widely expected to come in less than projected.

In normal times, the modest momentum would provide a dose of optimism for a government drawing up its budget.

But Canada’s current economic climate is far from typical. The November election win for U.S. President Donald Trump has led to significant uncertainty in what is by far Canada’s top trading partner.

Even with the recent economic improvements, there are widespread concerns in Canada about U.S. proposals, including discussion about major changes to trade and tax policies.

Many warn the changes, which could include a border adjustment tax, could have severe economic consequences on this side of the border.

For now, with so many unknowns, sources have said Ottawa has no plans to take steps in the budget to directly address the Trump-related economic fears.

It remains to be seen whether Ottawa will have the flexibility to respond to any changes implemented in the U.S. over the course of the year.

“The government is building this year’s budget with not a great deal of clarity about the geopolitical risks that could impact the Canadian economy,’’ said Craig Alexander, chief economist for the Conference Board of Canada.

“And so, they might want to be sensitive to that and they might want to delay some of the measures they were thinking about until they actually have greater clarity about what’s happening south of the border.’’

Indeed, major spending decisions on defence and international aid seem to have been deferred to later this year.

Even before any concrete economic moves by Trump, the U.S. resurgence has had negative effects in Canada.

A research note by TD last week said U.S. rate increases have already started to push up Canadian mortgage rates, creating “significant risk’’ in an economy with high household debt and soaring real estate prices.

Higher U.S. interest rates since Trump’s victory could also lead to bigger debt payments for Ottawa in the future, though some economists believe the effects will be offset by the benefits for Canada from a growing American economy.

At the same time, Ottawa faces tight fiscal constraints and it’s expected to deliver a slim budget with few big-ticket items.

The Liberals have already committed to major spending increases for investments over the coming years in areas like infrastructure and expanded child benefits, which they argue will help lift the economy over the long haul.