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Brace for March (Spending) Madness

— Craig Wright

Finance Minister Bill Morneau has a lot to juggle.

But he also has some mad money, and you can expect to share in it when he drops his pre-election budget after markets close.

Economists expect Mr. Morneau and his Liberals, under siege amid the SNC-Lavalin affair, to offer Canadians a fair bit under a second Trudeau government, while still coming across as fiscally responsible.

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The backdrop is an interesting one: Economic growth has flatlined, but the jobs market is solid and unemployment low, Canada still has a strong credit rating and revenue has topped expectations.

Finance Minister Bill Morneau

Dave Chan/The Globe and Mail

"We expect the March 19 federal budget to reflect this government’s penchant for spending," said Royal Bank of Canada chief economist Craig Wright.

"After all, it had no trouble boosting spending by an average of 6.5 per cent annually while the political and economic winds were blowing favourably," he added in his budget lookahead titled "Brace for March (Spending) Madness."

"With storm clouds appearing, in the form of weaker-than-expected domestic economic growth, we doubt the finance minister will change course."

Here's a look:

The goodies: What to expect

Observers are betting on child-care measures, at least some talk of pharmacare and ways to boost labour skills.

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"Each could have substantial costs associated with them," Mr. Wright said.

"We’re betting that each of these initiatives will get a down payment in the current budget, with promises of more to come in future years," he added.

"We would welcome a focus on skills, since it could address a current business challenge while at the same time creating better conditions for stronger economic growth in the period ahead."

Mr. Morneau is also expected to do something to help millennials get into the housing market, possibly by extending the maximum mortgage amortization, among other things.

Economists have warned that housing measures risk driving up home prices again, after policy makers at the federal and provincial levels have worked so hard to bring them down and corral a debt bubble.

As for pharmacare, it's not clear how far the government will go in terms of universal coverage in this budget, said Laurentian Bank Securities chief economist Sébastien Lavoie and economist Dominique Lapointe.

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"Every province has its own mix of private and public drug prescription coverage," they said.

“This patchwork of insurance plans is inefficient,” they added, noting that Canada has the third-highest per-capita spending on drugs across the countries of the Organization for Economic Co-operation and Development, after the United States and Switzerland.

“Second, many Canadians do not have access to the medication they need due to steep prices and insufficient coverage.”

A sweeping pharmacare plan would cost $19.3-billion if Ottawa absorbed the whole thing, the Laurentian economists said, citing numbers from the Parliamentary Budget Officer.

“The federal government could propose, later this year, the creation of such an initiative for 2020 as part of their election campaign,” they added.

“The government of Canada would likely bear the cost by transferring new funding to the provinces, which would ease financial pressures. Indeed, we believe that the most likely scenario is that the new federal program will preserve private-sector and provincial public coverage that goes beyond the essential medicine formulary.”

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And under partial coverage, costs would probably come in shy of that PBO number.

The goods: The economic backdrop

Economic growth is suffering, almost stalling in the fourth quarter and expected to do little better in the current three-month period.

“The Canadian economy is in stagnation, a much worse situation than a year ago when global economic momentum was strong,” said Laurentian’s Mr. Lavoie and Mr. Lapointe.

"Particularly, the rising number of consumer insolvencies, fading consumer spending and the cooling in activity in some housing markets calls for action."

At the same time, the labour market is strong.

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The economy is expected to perk up later this year. When you put everything together, including whatever Mr. Morneau does today, Bank of Nova Scotia chief economist Jean-François Perrault projected "a significant acceleration" in growth once we're through this quarter.

Of course, that will be then, and this is now.

RBC’s Mr. Wright warned that Mr. Morneau has to assume a “weakening revenue backdrop” as he spends, given the stall in gross domestic product in the fourth quarter and probably in the first.

"As a result, growth forecasts for nominal GDP (a key driver of government revenues) are being reduced," Mr. Wright said.

"We currently expect nominal GDP to rise by 2.1 per cent this year compared to an assumed growth rate of 4.1 per cent in the government’s fall economic statement," he added, calling on Mr. Morneau to "exercise spending caution" lest he miss his targets and upset the "downward trend" in the ratio of debt to GDP.

"To be sure, the government will get a break from lower-than-anticipated interest rates, but this won’t be enough to offset the impact of slower economic growth."

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Hey, good lookin': Budget balances

"The fiscal situation is certainly not dire, with the deficit weighing in at a modest 0.8 per cent of GDP," Bank of Montreal senior economist Robert Kavcic and Benjamin Reitzes, Canadian rates and macro strategist, said in BMO's budget preview.

“Also, Ottawa’s $3-billion risk adjustment is enough, at this point, to absorb a chunk of the downside from a weaker near-term economic growth forecast.”

CIBC World Markets chief economist Avery Shenfeld also has an interesting way of looking at it.

"Recall that in the last election, Canadians voted for the major party that wasn’t promising a balanced budget," Mr. Shenfeld said.

“In that, they were running ahead of economists, who only recently are coming around to a more benign view of debts and deficits in a low interest-rate era, albeit within limits.”

And the Liberals are lookin' good at this point.

So far this fiscal year, Ottawa's finances are in far better shape than expected, with an actual surplus in the first nine months of more than $300-million thanks to a surge in revenue. Keep in mind that Mr. Morneau's target for the full 2018-19 year is $18.1-billion as of the fall economic statement, and you get a sense of that mad money.

But this month is interesting because, where fiscal policy is concerned, March tends to come in like a lion and go out like a lion.

"Our view is bolstered by the fact that the final month of the government’s fiscal year is typically a large deficit month," said RBC's Mr. Wright.

"Over the last 10 years, the March deficit has averaged $7.3-billion, and the average over the last three (under the current finance minister) was $10-billion," he added.

"The most recent run includes three of the four largest monthly federal deficits on record. With that history in mind, we anticipate the March madness to continue in the form of substantial spending announcements."

The projected $18.1-billion deficit is deemed small, particularly when compared to other countries. And the Liberals are looking at a different measure.

"Ottawa has held to its promise of keeping its new fiscal anchor, the debt-to-GDP ratio, steady (it is actually on pace to dip for a second straight year)," said Mr. Kavcic and Mr. Reitzes.

There's an issue there for the BMO economists, though.

"The concern with this measure is that it’s an anchor that is destined to break," they said.

“Given we are late in the economic cycle, the next downturn will immediately weaken the denominator, sending that metric higher. From a longer-term credit perspective, it would be prudent to see this ratio falling more significantly late in the cycle.”

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