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Prime Minister Justin Trudeau speaks during the unveiling of Google's new Canadian engineering headquarters in Kitchener-Waterloo, Ontario January 14, 2016. (PETER POWER/REUTERS)
Prime Minister Justin Trudeau speaks during the unveiling of Google's new Canadian engineering headquarters in Kitchener-Waterloo, Ontario January 14, 2016. (PETER POWER/REUTERS)

Economists urge Ottawa to consider larger deficits to spur growth Add to ...

Economists are urging the Liberal government to consider deficits even deeper than those it has promised to further stimulate Canada’s slowing economy.

Prime Minister Justin Trudeau has already indicated that his government’s first budget could feature a deficit that exceeds the $10-billion-a-year cap the Liberals promised during the fall election campaign. But the government has repeatedly declined to say how much larger the federal deficit might be.

Trudeau: Infrastructure spending a 'solution' for economic woes (CP Video)

Avery Shenfeld, chief economist of CIBC World Markets, said the government should be considering a deficit as large as $30-billion.

“It’s apparent to me that the economic outlook has deteriorated to the point where one could easily question whether [a $10-billion deficit] is a sufficient boost, particularly with some provinces in a restraint mode,” he said.

Mr. Shenfeld said a $30-billion deficit would add about half a percentage point to economic growth and would be “well-warranted,” given the state of the economy.

The Liberal government needs to spur stronger economic growth over the coming four years to deliver on its ambitious spending plans while also eliminating the deficit before the next election. Mr. Trudeau and Finance Minister Bill Morneau argue that encouraging stronger economic growth is preferable to austerity as a way of balancing the books over the long term.

BMO chief economist Doug Porter agrees that a deficit larger than $10-billion would be justified, but he questions whether it’s necessary to go as high as $30-billion. As a point of comparison, the annual deficit hit $55.6-billion in 2009-10 as the Conservative government responded to the global financial crisis with a major stimulus package.

“While the outlook has darkened, I believe we are still a long ways away from the kind of dire circumstances we were in in 2009, which did justify a very dramatic ramping up of stimulus,” he said.

The drop in energy prices delivers a particularly sharp revenue hit to provinces such as Alberta, which counts on royalties from non-renewable resources. Alberta collected $9-billion in royalties in 2014-15.

For the federal government, the hit on revenue occurs indirectly. Lower commodity prices lead to lower economic growth and lower tax revenue flowing to Ottawa.

Finance Canada estimates that a one-percentage-point decrease in real gross domestic product growth would reduce federal revenue by about $4-billion. However, if the economy were to grow at a faster rate than assumed, Ottawa would collect extra revenue. This is at the core of the Liberal plan.

The Conservative government’s April, 2015, budget assumed the economy would grow 2 per cent in 2015 and 2.2 per cent in 2016. Mr. Morneau provided an economic update in November that was based on a survey of private-sector economists conducted in October.

That survey found the average forecast had declined to 1.2 per cent for 2015 and 2 per cent in 2016. Economists also said they expected economic growth to average 1.9 per cent over the 2015-to-2019 period.

The Liberals took those numbers and then further adjusted them downward as a form of cushion in case the economy underperformed even those gloomier forecasts. So far, that has happened and Mr. Morneau said this week he’s glad those adjustments were made. Since the update, several private-sector economists have further lowered their expectations for 2016.

Economists say federal infrastructure spending as promised during the campaign will have a small, positive impact on economic growth. For instance, Royal Bank of Canada has estimated that the Liberal plans as announced to date could boost growth 0.4 per cent.

However, RBC economist Laura Cooper pointed out the growth impact will be higher if the Liberals decide to run larger deficits than the $10-billion a year cap promised during the campaign. The Liberals now say the focus is on keeping the debt as a share of the economy on a downward trajectory. By that measure, deficits could be around $25-billion a year, depending on growth.

Trudeau touts innovative tech sector

Prime Minister Justin Trudeau delivered an upbeat economic message at Google Canada’s new Kitchener, Ont., headquarters in an effort to show that some sectors are still doing well in spite of a stream of negative market news.

The Liberal government is preparing its first budget as persistently low prices for oil and other commodities are beginning to drag on the broader Canadian economy. The decline in commodities has led to sharp losses on the Toronto Stock Exchange and the value of the dollar has slid in recent months. But Mr. Trudeau stressed Thursday that Canada is a diverse economy where some sectors are doing better than others.

“We’re still looking at growth. It’s not as strong as we’d like but I think there are tremendous fundamentals that we can be very proud of in the Canadian economy,” he said. “I’m very, very optimistic about our capacity to get Canada moving forward in the right direction after a time in which we had put all our eggs in one basket.”

The Liberal Leader was elected in October with a promise of “sunny ways,” coupled with an emphasis on infrastructure investment over austerity. The drumbeat of grim economic news in recent weeks has not led a change in tone from the Prime Minister. Mr. Trudeau was in the Kitchener-Waterloo region Thursday, where he visited BlackBerry offices before his public event at Google’s recently unveiled Kitchener office, which has 185,000 square feet of space and is expected to host hundreds of engineers.

“My visit here today is really to highlight that there is tremendous positive news in the Canadian economy, innovative startups right across the country, people looking to solve challenges that the world is looking for solutions for and I’m really excited about where we’re going and how we’re going to get there together,” he said.

Speaking to a packed room full of Google engineers, he recounted how at a previous visit to Google’s Montreal office he rode a unicycle and tried a climbing wall, and regretted that kind of photo opportunity didn’t fit with “the stature that comes with my new job.”

He started his visit with a photo op of children in a junior-engineer workshop, giving a virtual-reality tour of the House of Commons and getting a 3-D scan of his head, which the children intended to print into a plastic bust – or a 3-D selfie – of the Prime Minister.

Bill Curry and Shane Dingman

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