Big guns blast the budget
The reception that greeted last week’s federal budget from fiscal conservatives was predictable. If you agree with American tax reduction advocate Grover Norquist that government should be shrunk down to a size where it can be drowned in a bathtub, you probably didn’t appreciate a budget that will send federal net debt levels to $1.4 trillion within five years.
The Trudeau government can brush off such criticism as ideological and partisan. It will find it harder to discount the reaction from an officer of Parliament and from respected economists who have been allies and colleagues in the past.
The critique coming from the Parliamentary Budget Officer, Yves Giroux; from two former Bank of Canada governors — David Dodge and Mark Carney — and from former senior Liberal adviser Robert Asselin, is that a budget that claims to build prosperity for the future overstates the amount of growth it is likely to generate.
Giroux told the finance committee on Tuesday that a chunk of the $101 billion the government touted as economic stimulus was in reality a continuation of existing COVID-19 support measures.
Dodge told the Globe and Mail this week that a budget which positioned itself as being pro-growth does not invest much in growing Canada’s economic capacity at all. “My policy criticism of the budget is that it really does not focus on growth,” he said. “To me it wouldn’t accord with something that was a reasonably prudent fiscal plan, let me put it that way.”
He said that of the $100 billion billed as being a catalyst for growth, he estimates that only $25 billion adds to public or private investment, with the rest increasing consumption.
Those will be painful words for Chrystia Freeland to hear, given Dodge has been something of an intellectual godfather for the Trudeau Liberals. His endorsement of the use of temporary deficits to finance productivity-enhancing infrastructure investments were emblazoned on the Liberal policy platform in 2015.
The finance minister might have expected a more ringing endorsement from Carney, the godfather to one of her children and someone who appeared at the recent Liberal convention saying he would do what he could to help the party. The former Bank of England governor appeared on the Herle Burly podcast this week, with former Paul Martin adviser David Herle, and damned the budget with faint praise.
He talked about how COVID has accelerated “the digital and sustainable revolutions” and how the budget did “some things” to push the economy in that direction. “But it’s going to take more than one budget. I don’t think the government would pretend otherwise that this is job done,” he said. “In my judgment, this was a hybrid budget, in that it had to conquer COVID by doing important things on the social side and to start growth. What we are seeing in some other jurisdictions is that the focus is more squarely on the growth. And when the focus is more squarely on growth, more and more spending is direct government investment or the type of taxes and other measures that encourage private investment to (create) the growth in jobs and income that we need down the road.”
Even with Carney’s fancy footwork, it’s plain he would have preferred more investment and less spending.
Asselin, a former budget and policy adviser to Trudeau’s first finance minister, Bill Morneau, is more blunt in his assessment. He labelled the short-term stimulus as “a political solution in search of an economic problem” in an article in The Hub, a new online commentary website.
He pointed out that the budget assumes economic growth of 5.8 per cent this year, four per cent next year, before moderating to two per cent for the rest of the forecast horizon. He criticized the lack of a coherent growth plan, with the bulk of innovation funding going into a Strategic Innovation Fund that has been neither strategic nor innovative. “Does it drive business investment and make our firms more competitive? Nobody has ever tried to answer this question seriously in Ottawa,” he said.
Asselin spoke from experience when he said the most likely outcome of the stimulus spending is “long queues of ministers and their senior officials in line at Treasury Board meetings with their budget submissions.”
The budget has added “layers of duplication and bureaucratic complexity to a system that was not known for its nimbleness and agility,” he said.
In addition to the prospect of disappointing growth numbers, all four economists acknowledged the inherent risk of soaring debt loads.
Giroux pointed out that, even with a new fiscal anchor that aims to reduce debt to GDP levels from a high of 51.2 per cent, there is no intention to reduce that ratio to pre-pandemic levels in the low-30s. He said the government has decided, effectively, to stabilize the federal net debt ratio at a higher level through to 2055, with all the implications that follow for future fiscal room.
Dodge said that, while the rising debt burden is a concern, it is not yet a problem — and won’t become one as long as interest rates remain lower than growth.
On the rising debt level, Carney said “just because something is possible, doesn’t mean it is optimal.” He pointed out if the growth strategy is successful, it will force interest rates to rise, which will have a knock-on impact on debt servicing costs. The PBO has estimated that a one per cent rise in interest rates would cost $4.5 billion more in the first year and an increase of $12.8 billion by year five.
But while most economists agree the debt is manageable, there is a sense of missed opportunity in the budget. Asselin accused the government of contriving a false economic premise to justify spending on “unfocused and unimaginative structural spending.”
All would clearly like to see more public capital investment, more incentives for private investment or, ideally, both. Instead, we have a federal government that is failing to create the conditions needed to make Canada the best place in the world to do business.
Just three days after the budget, Canadian chipmaker Alphawave decided to move its headquarters to the U.K, and issue shares on the London Stock Exchange to fund a new research centre in Cambridge, England. That’s not Ottawa’s fault necessarily but it isn’t helping.
An additional $12 billion to bolster Old Age Security in the budget is good news for seniors but it does very little to catalyze long-term growth.