Ottawa can add $15B in stimulus: U.S. bank
The Federal government could spend an additional $15 billion in stimulus per year without hurting Ottawa’s fiscal health, says the Bank of America Merrill Lynch.
The Liberal government is set to unveil its budget in the next two months, with expectations that there will be at least $5 billion a year in new infrastructure spending to help Canada’s struggling economy.
Officials said last month that Prime Minister Justin Trudeau is in talks to quickly allocate $1 billion in stimulus to Alberta and Saskatchewan, both hard hit by the crash in oil prices.
Bank of America Merrill Lynch economist Emanuella Enenajor says that based on her calculations, spending an extra $15 billion annually would still keep the government in line with its goal to keep lowering the debt-to-GDP ratio.
“Although there are still many unknowns with the timing and content of the federal budget, we argue that Ottawa has room to spend more than initially announced, helping to ease the pain of the oil shock,” she said.
Enenajor’s calculations take into account a predicted $1.6-billion budget shortfall stemming from the new tax measures the government is undertaking. The Parliamentary Budget Officer calculated the measures, set to raise the tax rate on incomes over $200,000 and cut it for middle income earners, will drive up the deficit.
The extra wiggle room would a government that faces pressure to resuscitate a struggling economy. The Bank of Canada said last month it was holding its benchmark interest rate unchanged as it awaits news of how much stimulus will be allocated in the upcoming federal budget.
Finance Minister Bill Morneau last November adopted debt-to-GDP as a key “fiscal anchor,” saying he aims to keep the ratio moving downward. Even if debt grows in this scenario, as long as the economy grows faster, the ratio can continue to be lowered.
But Enenajor said the government should use any additional stimulus spending on the right measures. Additional tax cuts, she notes, will do little to kickstart Canada’s economy.
“Most studies on the impact of public spending highlight infrastructure as having the best bang-for-buck,” she said. “Economists refer to this bang-for-buck as the “fiscal multiplier": the dollar impact on GDP associated with a dollar of government spending.”