Wednesday’s federal fall economic statement delivered two main messages to Canadians. A shame they’re contradictory.
One is that the Canadian economy is humming along very nicely, thank you. Growth is strong. Jobs are plentiful. Corporate profits are booming. Things are going so well, in fact, that the government now has a few billion dollars more flowing into its coffers than it had expected – not only in the current 2018-19 fiscal year, but for several years to come.
The other is that the only responsible thing for the government to do is to spend that extra money, and then some, to support growth, provide jobs and help businesses. So much support, in fact, that it is now budgeting to increase the federal deficit to nearly $20-billion next year, and projects bigger deficits than previously forecast for several years to come.
If the Trudeau government truly believes what it is saying about the economy, then its spending plans don’t follow.
Under conditions that provide the government with not only good reason but ample opportunity to restrain its spending and reduce its budget deficit, it seems determined to do the opposite. It’s inconsistent not only with the government’s own election promises, but with sound economic policy.
Remember, this government was elected on a platform of running small deficits of less than $10-billion a year over the short term in order to jump-start infrastructure investment, and to return to balanced budgets by 2019-20. By that time, it promised, the federal debt-to-GDP ratio would be whittled down to 27 per cent.
We’re not far from the 2019-20 budget year, which starts April 1, and the government projects not a balance, but a deficit roughly twice as big as the biggest shortfall it had promised to run. Debt-to-GDP is on track for 30.5 per cent – little changed from when the Liberals took office three years ago.
Some unexpected economic woes related to oil’s price collapse pushed the deficit much higher than the government had anticipated early in its mandate, but those troubles are well behind us. The government’s revenue projections for 2019-20 are $10-billion higher than they were in its 2016 budget. Yet the projected deficit for the year has actually increased by almost $2-billion. Instead of banking its economic windfall for a rainy day, it’s spending every penny of it – more than every penny.
It’s bad enough that the Trudeau Liberals have abandoned their pledge to return the budget to balance, and don’t seem the least bit bothered by what is either a lack of discipline or a lack of honesty – neither of which will look good to many voters when they go to the polls next fall. But it’s also shoddy economics.
The Canadian economy is running near full capacity and with near full employment. It is not in need of additional stimulation from government spending. Indeed, very good arguments could be made for Ottawa to ease the pace of spending. That would not only take advantage of good times to clean up the government books, but it would take some of the air out of an economy that is already quite thoroughly pumped up. (This is why the Bank of Canada has been raising interest rates – to remove stimulus from an economy that no longer needs it.)
Granted, the timing of this unnecessary fiscal boost has little to do with where we stand in the current business cycle. The government’s hand was forced by massive U.S. corporate tax cuts earlier this year, which prompted the business community to call, loudly and insistently, for a Canadian response. Tax incentives for business investment thus account for most of the new spending.
The measures may well pay dividends for the Canadian economy down the road, encouraging more investment that will boost capacity and productivity, both key elements to future growth. Nevertheless, by responding to the U.S. tax cuts, Canada has now done exactly what many economists criticized the U.S. administration for doing – pouring gasoline onto an already hotly burning economy, driving up the deficit in the process. (Albeit on a more modest scale, on both fronts, in Canada’s case.)
Canada’s spending plans will boost economic activity in the near term, just as the U.S. fiscal stimulus has juiced growth in that country this year. But it may simply pull forward growth from future years, while putting more pressure on a full-capacity economy and, by extension, perhaps pressing the Bank of Canada into even faster interest-rate increases. It is expending fiscal ammunition that might be better saved for when the economy heads into its next downturn – which many economists think is inevitable in the next few years.
A cynic might suspect that this is exactly what the government had in mind – to spend some found money to dress up the economy in an election year, and deal with the consequences later. If that’s the case, it’s gambling that voters care more about temporarily strong growth than persistent deficits, broken promises and ill-timed fiscal policy.