A pivotal budget that wasn’t

Now that the hoopla has faded and the Parliamentary Budget Officer and others, including ourselves, have waded through the 9-megabyte, 724-page federal budget, it is much clearer what kind of beast it both is and is not. As a political statement, it should yield electoral dividends. As an economic statement, it favours short-term consumption over private-sector investment, sprinkles spending initiatives far and wide, adds heavily to the federal debt, and misses an urgent opportunity to rebuild our longer-term growth post-pandemic.

First — and this is a flashing red light to international investors, who are under no obligation to hold Canadian assets in their portfolios — it does not set a clear fiscal anchor to earn the trust of rating agencies and impose fiscal discipline within government. Instead, it offers a very general statement: “the government is committed to unwinding Covid-related deficits and reducing the federal debt as a share of the economy over the mediumterm.” Prior to the pandemic, a low debt-to-gdp ratio of about 30 per cent reassured markets, but no longer. We are now looking at a debtto-gdp ratio of about 50 per cent for as far as rosy assumptions and the budgetary eye can see. But beyond that limited horizon, today’s low interest rates will rise as global growth accelerates, particularly in the United States and China, and inflation picks up.

Second, the $100 billion in new short-term stimulus spending is just that: massive and short-term. It is also at odds with the Department of Finance’s own March survey of 13 private-sector economists. Their collective forecast saw real gross domestic product (GDP) roaring back this year on the back of: vaccinations releasing pent-up demand, unprecedented household savings, and a booming American recovery. After a contraction of 5.4 per cent in 2020, they projected growth of 5.8 per cent in 2021 and a further four per cent in 2022, bringing the Canadian economy back to pre-pandemic levels of capacity utilization by early-to-mid next year without any need for a $100-billion fiscal injection.

While it was disappointing that the economy lost 207,000 jobs in April, erasing two-thirds of March’s gains, the decline was largely driven by temporary pandemic lockdowns and restrictions in Ontario and British Columbia. The short-term economic risk facing the economy is not a shortfall of demand but constraints on supply due to lockdowns, and these do not change the backdrop for a robust recovery in 2021 and 2022.

Third, despite the extraordinary emphasis on stimulus, there is little focus and few measures to rebuild Canada’s longer-term growth. Experts ranging from the IMF to the Bank of Canada to most Canadian private-sector forecasters project that our potential growth will drop well below two per cent over the next several years due to weak productivity, tanking competitiveness, and labour force challenges. The impact on jobs, incomes, the growth of firms and the affordability of public services will be profound, not to mention our capacity to service government debt.

Fourth, while we wholeheartedly applaud the budget’s signature initiative — the commitment of up to $30 billion over five years to build a high-quality, affordable, and accessible early learning and childcare system across Canada — its implementation will be extremely complex and likely quite contentious. It requires the concurrence of fiscally-stressed provinces and territories — some of whom are at risk of downgrades from rating agencies, many of whom have other immediate priorities and all of whom jealously guard their social policy prerogatives under the Constitution. In addition, our governments’ mixed record in containing the pandemic and vaccinating Canadians highlight some of the policy development and implementation gaps that exist at all levels of government. Can Ottawa realistically expect to implement this complex new initiative as well as the 175 other new initiatives promised in the budget?

Fifth, budgets are always about choices and tradeoffs. This budget offers little targeting of the spending measures to the groups most affected by the pandemic — continuing the problems of the CERB. Brian Mulroney made a clear choice when his government scrapped the hidden Manufacturers Sales Tax and replaced it with the politically unpopular but economically efficient Goods and Services Tax. Similarly, Jean Chrétien cut like a surgeon to rebuild Canada’s fiscal flexibility, which eventually allowed his government to make pivotal investments that spurred research and innovation. Where are the tough choices and tradeoffs in this budget? Where is the fiscal strategy to fund the permanent new program spending and new debt while rebuilding fiscal resiliency to handle inevitable future shocks? This budget’s intergenerational transfer of debt and risk is unprecedented.

The budget will nearly double the federal debt from pre-pandemic levels to $1.4 trillion by mid-decade, but to what purpose? Where is the strategy for rebuilding Canada’s longterm growth or improving Canadian competitiveness or reversing the slide in our productivity growth and living standards? Where is the fiscal anchor to moor expectations and force budgetary trade-offs? At a pivotal time, as Canadians can begin to see light at the end of the pandemic tunnel, we cannot afford to put off dealing with many of the tough structural issues that need tackling in a polarizing world.