Finance Minister’s budget has tough economic expectations to fulfill

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Finance Minister Bill Morneau is carrying responsibility for Prime Minister Justin Trudeau's big Liberal promise: expanding economic growth and opportunity for the middle class.

So Mr. Morneau's challenge, when he delivers his first budget on Tuesday, isn't living down bigger-than-promised deficits. It's living up to expectations that the government can get the economy rolling. Mr. Trudeau campaigned on hope, and now Mr. Morneau has to squeeze it onto a financial statement.

His problem is that the $10-billion or so he has available to boost the economy in the short term won't go as far as Canadians expect. And the long-term growth strategy that the Liberals promise isn't really ready.

The deficit will attract attention. It's likely to approach $30-billion, far more than the $10-billion cap pledged during the election campaign. But Canadians know the red ink will flow, and they don't seem to care much. They were tired of the dour restraint, and welcome government intervention.

Yet most of the deficit won't be caused by intervention. It will be because of the sliding economy. The forecast for GDP growth in 2016 has been downgraded twice since last year's budget, from 2.2 per cent to 1.4 per cent – and some economists expect less.

Even before the new measures in his budget, Mr. Morneau projected an $18-billion deficit. With the exception of a few measures the Liberals have already announced, that's the "starting point," noted McGill University economist Chris Ragan.

That means that in a budget with a $29-billion or $30-billion deficit, only $11-billion or $12-billion will be stimulus – new money pumped into the economy. That's half a percentage-point of GDP, Mr. Ragan noted, so it will boost the economy from lacklustre growth to slightly-better lacklustre growth. It's helpful, Mr. Ragan said, "but nothing to write home about." Given that, he argues, the government should be trying to ease the pain in the labour market.

But the public is still living on the election-rhetoric expectation of an economic boost. In the short term, at least, the Liberals will post the big red deficit numbers of an interventionist government, but seeing a slow-growth economy. That threatens disappointment.

So in recent weeks the Liberals have been playing down the idea they're trying to kick the economy into short-term growth. In an interview with The Globe and Mail on Friday, Mr. Morneau said he's going to focus on the long term, emphasizing science, education and innovation.

Those things can indeed be long-term growth drivers by increasing productivity. But Mr. Morneau's assertion that this budget will be about the long term is that the Liberal government is visibly unready to present its long-term economic strategy.

Last month, Mr. Morneau named management consultant Dominic Barton to lead an economic advisory council tasked with crafting a growth strategy by the end of the year.

Those big infrastructure spending plans the Liberals touted during the election campaign aren't yet fully baked, so Infrastructure Minister Amarjeet Sohi has put forward a two-step plan: big new projects will wait, while this year's spending will focus on funding "deferred maintenance," like repairing the roof on a hockey rink or a pump at a water plant.

Maintenance can be useful, but Mr. Ragan noted that for a real longer-term growth strategy, the government will want to target its infrastructure funds for items that increase productivity, like a highway or bridge that will unblock a traffic bottleneck to help goods get to market. The Liberals, it appears, aren't at that stage yet.

Mr. Morneau might provide funding for innovation and science, but Navdeep Bains, the Minister of Innovation, Science and Economic Development, hasn't started outlining the innovation strategy he's to deliver later this year.

The public might be patient. But Mr. Morneau won't have the same leeway to try again many times: Eventually, the public, and economists, will worry if deficits remain high. His budget figures must offer enough assurance that Mr. Trudeau's economic promise will be fulfilled to overcome the disappointment that could set in later this year, when the short-term economy remains lacklustre, and the long-term strategy is still unclear.