Morneau’s grace is under fiscal pressure
When Bill Morneau was asked about a Finance department report that predicted Canada will not balance its budget until 2050, and also forecast the national debt will more than double to $1.5 trillion, he was unperturbed.
The report did not take account of the brilliant measures the Liberals are taking to improve Canada’s economy, the finance minister said.
“It did not show the impact of the investments we have made in infrastructure and will continue to make so that we can grow our economy,” he said in the House of Commons, with a braggadocio that he may not have felt.
Yet, as a new Senate review of Ottawa’s infrastructure plan makes clear, stimulus spending is not like a vending machine, where you insert your money and economic growth is dispensed on demand.
The Senate finance committee report said that the current application process is overly complicated, which makes it hard for money to get out of the door. The committee recommended a strategic plan that included a “single window” through which provinces and municipalities could apply.
The Liberals have pinned their hopes on the idea that the $186 billion they plan to spend on infrastructure between now and 2028 will spark economic growth sufficient to offset a fall in the ratio of working-age Canadians to seniors, from five over the past decade to 2.5 in less than 20 years.
But the government’s fiscal track record does not inspire confidence that the Finance department’s forecasts are wildly off-track.
A report from the Parliamentary Budget Office last week said nearly $3 billion in federal spending approved for the current fiscal year will not be spent. Around one-third of that amount was earmarked for infrastructure programs that have fallen behind. “Parliamentarians may wish to inquire about the reasons why specific allotments have been frozen,” the PBO report suggested.
A day later, Ottawa’s monthly Fiscal Monitor was released, showing that the government ran a $14-billion deficit in the first nine months of the fiscal year, on the back of program expenses that rose 8.8 per cent compared to a year earlier.
Current spending projections anticipate average annual growth of 6.5 per cent from 2015-16 to 2017-18. Yet according to the government’s own numbers, average spending growth is supposed to fall to 2.4 per cent between 2018-19 and 2021-22.
“Achieving the projected drop in spending growth would require a type of sustained fiscal discipline that certainly deviates from recent behaviour,” said Sean Speer in a paper for the Macdonald-Laurier Institute.
As Speer pointed out, even if the government did manage to meet those tough targets, it still wouldn’t achieve budgetary balance. The odds are that deficits will be larger in the out years than projected in the past fiscal update.
Remember the Liberals justified deficit spending as a means to an end — namely to increase economic growth. Thus far, we have seen more of the former than the latter — the Conference Board predicts the Canadian economy will expand by just 1.9 per cent this year.
The world still loves Canada. Morneau pointed out that even the Finance department’s long-term projection report deemed the economy “sustainable” — that is, debt will grow at a slower pace than GDP expands.
S&P Global Ratings recently reaffirmed this country’s stable AAA credit score, praising its predictable policy-making, strong public institutions, diversified economy and fiscal flexibility, as well as judging the government’s “mild counter-cyclical fiscal deficits” as pragmatic.
But, as Morneau is discovering as he prepares his March 28 budget, he has less and less flexibility, while the deficits he’s looking at are far from mild.
Nor do any of the numbers discussed here take account of the costs of responding to Donald Trump’s new protectionist administration.
Morneau is in Washington Wednesday to meet Trump’s new Treasury Secretary, Steven Mnuchin. The two men will be able to compare notes on how to invest billions in infrastructure, while maintaining fiscal stability.
The Canadian will surely hope his American counterpart doesn’t add to his anxiety.