Kevin Page is president, Mostafa Askari is chief economist and Sahir Khan is executive vice-president at the Institute of Fiscal Studies and Democracy, University of Ottawa. The authors are also former members of the federal Office of the Parliamentary Budget Officer
On March 19, Finance Minister Bill Morneau will table his fourth budget. With an election looming this fall, Budget 2019 will be an election budget.
A lot has changed since the Liberal government was elected in 2015. In the face of a weak economy, Prime Minister Justin Trudeau promised “sunny ways.”
Sunny ways came. The economy strengthened. The unemployment rate fell. But, in 2019, there are clouds on the horizon. Some of these clouds come from economic factors. The global economy shows signs of distress in the face of trade and political tensions. Some of the clouds are coming from self-inflicted mistakes. The SNC-Lavalin affair has preoccupied the government and could affect confidence in its ability to manage the country’s affairs.
Jean-Claude Juncker, the president of the European Commission, once said: “We all know what to do, we just don’t know how to get re-elected after we’ve done it.” To state the obvious, the political challenge facing the government is to table a budget that will enhance electoral prospects. In this context, we believe the 2019 budget must address four challenges.
Challenge No. 1 is building confidence in the face of growing economic uncertainty. While job numbers continue to to exceed expectations, the economy ground to a halt in the last quarter of 2018. Both investment and exports fell sharply reflecting global uncertainty and weak oil prices. If continued, the job market would eventually be negatively affected, and we would see a rise in the unemployment rate. The budget should reassure Canadians that the government is addressing some of the underlying causes of the current economic headwinds. A clear path on negotiating with the United States on removing the tariffs on steel and aluminum and getting the United States-Mexico-Canada Agreement approved and implemented by all three parties is essential. The budget also needs to show a clear plan for expansion of the Trans Mountain pipeline to restore confidence in Canada’s oil industry.
Challenge No. 2 is building confidence with a credible fiscal plan. It must be prepared to make policy trade-offs. The 2018 Fall Economic Statement projected modest and declining budget deficits. Analysis by the Institute of Fiscal Studies and Democracy, the Parliamentary Budget Officer and the government indicate that it is possible to run modest deficits for a long period of time and still have a sustainable fiscal system. However, the government has to take into account current economic risks that could affect fiscal sustainability. It must take into account its ambitious plans for infrastructure investment, defence spending and possibly a pharmacare program. Achieving these objectives and showing a declining deficit track and debt-to-GDP ratio would require a careful assessment of policy trade-offs.
Challenge No. 3 is strengthening productivity and competitiveness in Canada. The very strong job market together with the recent lacklustre growth in GDP reflects a sharp decline in productivity growth. There is no magic solution for this problem. But it is clear that stronger growth in business investment, reducing barriers to external and internal trade and government investment in infrastructure help boost productivity growth. The latter, particularly, is an area where the government has more control. Investment in infrastructure can have substantial positive impacts on growth and productivity, but the focus has to be on the infrastructure investment that facilitates transportation, exports and innovation. Not all infrastructure investments are equal and not all government spending can be called investments.
Challenge No. 4 is maintaining momentum on long-term policy issues related to climate change, income inequality and reconciliation with Iindigenous Canadians. These are all objectives essential for peace, order and good government that will shape the future for the next generation of Canadians. They need to be reinforced in the 2019 budget within a credible medium- and long-term fiscal framework.
The current political debate about the SNC-Lavalin affair is an enormous distraction for the government, which could affect business and consumer confidence as well as confidence in the government ahead of this year’s election. The economic and political stakes are high. The government must demonstrate that it not only knows what policies are needed but it knows how to implement them and get re-elected.