FEDS FACE LESS CASH
Reduced options for spending
Prime Minister Justin Trudeau’s fiscal leeway is shrinking just as demands for spending are beginning to mount.
The Finance Department has completed its latest survey of private sector economists and the numbers paint a worsening picture for national income and revenue. Compared with forecasts they gave for the March budget, the economists project almost $50 billion less in nominal output — the best indicator of revenue — over the next two years. That’s a markdown of more than one per cent off Canada’s $2-trillion economy.
A weakening revenue outlook means budget reserves are being eroded quickly and Finance Minister Bill Morneau won’t have much wiggle room to accommodate calls for more funding for things like infrastructure — or requests from cabinet colleagues or provinces for additional spending — without running even higher deficits. Morneau’s department has already begun work on next year’s budget, due sometime early in 2017, while an update of the 2016 plan is expected in November.
“Since the last budget we’ve seen income growth coming in that’s softer than expected at the time of the 2016 budget,” said Craig Alexander, chief economist at the Conference Board of Canada and one of the survey contributors. “This will have an impact on tax revenue growth.”
While the department declined to provide the results of its survey, Bloomberg News gathered forecasts from 10 of the banks and research groups that took part.
Pressure to increase spending is beginning to grow even with the government already projecting $120 billion in deficits over the next six years. Calls for more government stimulus are growing, for example, given the weak economic outlook. Morneau is also in the part of the budget cycle when cabinet ministers and other stakeholders make their funding requests — which in this government’s case are poised to be substantial, given Trudeau’s ambitious agenda. Provincial governments, meanwhile, are pressing Trudeau to increase health-care funding.
The Finance Department surveys economists up to four times a year, and the results form the basis of its own economic forecasts; this month’s poll is the last before the fall fiscal update. At a news conference on Monday in Ottawa, Morneau declined to say when the update will be released and whether it will include additional measures to spur the economy.
To be sure, the government has budgeted reserves for exactly this slower-growth contingency, but the money set aside is being tapped into quickly.
In his March budget, Morneau assumed a much slower growth outlook than the one economists were projecting. The tactic effectively gave him a $6-billion annual revenue cushion against any slowdown. But using the Finance Department’s own revenue collection assumptions, it looks like Morneau has less than half of that cushion left to him for the next two years.
In some ways, the weaker economy is a vindication for Morneau, who was criticized following his budget for being overly cautious and unnecessarily inflating deficit projections.