Minister of Finance Bill Morneau responds to a question during question period in the House of Commons on Parliament Hill in Ottawa on Monday, Feb. 22, 2016. THE CANADIAN PRESS/Sean KilpatrickSean Kilpatrick/The Canadian Press
They've barely settled into their new offices, and the Liberal government is already $18-billion in the red. Blame the economy. Last fall, economists were expecting 2 per cent growth in 2016; as of early February, private-sector forecasters had cut their growth expectations to just 1.4 per cent. Oil prices? Last fall, the estimate was for $54 (U.S.) a barrel this year; that's been knocked down to just $40. Unemployment? It's likely to average 7.1 per cent this year, 0.3 per cent above November's prediction.
The bottom line on Finance Minister Bill Morneau's fiscal and economic update, delivered Monday, is that the economy has deteriorated since the election, and tax revenues with it. Yes, there is one obvious bit of fudging in the math, with Mr. Morneau doubling the traditional risk cushion in the budget, to $6-billion. But even ignoring the contingency fund, it's still a deficit of $12-billion in 2016-17 – bigger than the Liberals promised during the campaign, and almost entirely not of their doing.
The question is how the government should respond. The Bay Street Chief Economists' Choir has been calling on Mr. Morneau to stimulate a faltering economy by running up the deficit. Given Canada's low debt-to-GDP ratio, there's no danger if Ottawa delivers a shortfall well north of $12-billion for a year or more.
The idea behind short-term, stimulative deficit spending is that, when the private sector pulls back, government can take up the slack by pumping money into the economy, quickly. However, the Liberal election centrepiece – a 10-year, $125-billion infrastructure fund – was about fostering long-term economic growth though careful investments in productivity-enhancing infrastructure. Infrastructure takes time to plan, at least if you want it done right.
In contrast, steps such as making it easier for the unemployed to claim employment insurance benefits, or giving out extra weeks of benefits, can get money into the economy quickly. But they don't raise long-term productivity.
The important thing to watch for in Mr. Morneau's March 22 budget will not be the size of the deficit. It will be whether he has chosen the right tools to deal with two distinct economic challenges. Canada has a short-term problem of economic output being below potential, and a long-term problem of economic growth being sluggish. Different problems call for different tools.