Liberals set to throw open treasury in federal budget
Prime Minister reiterated his government is choosing ‘investment’ over ‘austerity’
The federal Liberal government is about to unveil its first budget since being elected last fall on a bold promise to spend Canada’s way out of the economic doldrums.
After a decade of Conservative budgets aimed at cutting taxes and the size of government, the Liberals are set to throw open the treasury — albeit cautiously — to billions in new infrastructure projects.
While other industrialized countries try to cut their way to balanced budgets and central bankers exhaust their ability to boost growth via low interest rates, Prime Minister Justin Trudeau reiterated this week Canada is choosing “investment” over “austerity.”
“A lot of people are on the austerity side, thinking they have to control government spending. Canada is positioning itself on the investment side . . . Whether it’s investing in clean technology, renewable energy, startups and the knowledge economy, roads and bridges, and hospitals . . . the kind of infrastructure that’s going to lead to a better quality of life,” Trudeau said in an interview with Bloomberg TV on Thursday.
For the first two years, the government is going to focus on the “unsexy” things, like upgrading and maintaining existing structures and subway signals on transit lines, he said.
“Then we get in to the bigger, longer-term things, once we’ve been able to plan them through.”
But will it work? While the broad strokes of the plan are well known, the details won’t be revealed until federal Finance Minister Bill Morneau, a political neophyte and Bay St. insider, stands up in the House of Commons on Tuesday to deliver his budget speech.
“During the (election) campaign they can promise everything under the sun, from pollution to panda bears. But in the budget they have to cost it out, set priorities and decide what they really care about,” said Hendrik Brakel, senior director, economic, financial and tax policy, with the Canadian Chamber of Commerce.
The economic landscape has shifted dramatically since last fall, when the Liberals promised to cap annual deficits at just under $10 billion and return to balanced budgets within four years.
In an unusual prebudget fiscal update in February, the finance minister said the government would run a $18.4-billion deficit in 2016-17, far higher than the $3.2-billion deficit projected last fall.
The new figure includes $2.3 billion in measures the Liberals have already taken since assuming office, including tax cuts for the middle class and a $250-million stabilization payment to Alberta.
But it doesn’t take into account the nearly $10 billion a year Ottawa has said it would spend over the next two years to boost the economy and create jobs through transit, affordable housing, clean technology and other measures.
Most economists now expect the federal deficit will approach $30 billion this year, though some have said the Liberals need to spend more to have any real impact, while others have cautioned against running up Canada’s long-term debt.
Canadian Imperial Bank of Commerce economists urged the government earlier this month to double its spending plans this year, saying the current plan would produce a mere 0.5-per-cent gain in economic growth.
With Alberta in recession and Canada’s unemployment rate at 7.3 per cent, and economic growth projected at just 1.4 per cent, some economists argue the country could use a little more help.
Others fear bigger deficits run the risk of delaying the Liberals promise to balance the books within four years, a pledge the government has lately downplayed.
The C.D. Howe Institute said this week Ottawa could run smaller deficits — $15.5 billion this year and $12.2 billion next year — and still provide some economic juice while also cutting things like civil servant’s pensions and benefits.
The Toronto-based think-tank said Morneau’s projection contains an unnecessarily high contingency fund — $6 billion — when $3 billion would suffice.
Marvin Ryder, an assistant professor at McMaster University’s DeGroote School of Business, says Morneau is simply doing what every finance minister before him has done. “He’s going to name a deficit number he thinks he can beat. So that in March of 2017, he can say it was only $24 billion, not $28 billion, and we’re all going to say: you did a great job!”
Trudeau has defended his government’s plans, saying it strikes the right balance between the need to invest and the requirement to be fiscally responsible.
“We feel what we’ve put forward is what the economy can absorb as a way of creating the long-term growth we want,” Trudeau said in the Bloomberg TV interview. “I don’t know that throwing much more money at infrastructure this year, for example, is going to result in the kind of productivity gains or growth for the economy that we need.” The time is ripe. The cost of borrowing is near historic lows, Canada’ debt-to-GDP ratio is one of the lowest among the G7 industrialized nations and the Bank of Canada’s ability to spur additional growth through lower interest rates is pretty much exhausted, Trudeau said.
“We should be investing and using fiscal levers a little more, not just expecting monetary policy to fix the challenge we’re facing, because I think we’re approaching the limits of the impact of monetary policy alone,” Trudeau said.
Indeed, central banks around the world have cut interest rates to near zero — in some cases below that — since the global recession of 2008-09 with precious little to show for it. Eight years later, economic growth across the globe remains disappointing.