I tweeted my disappointment over the Canadian budget and the responses were incredible – practically universal support for running deficits that weren’t supposed to be around based on the government’s own projections three years ago in favour of a variety of pet projects.
What I find particularly distasteful are the measures to spur mortgage borrowing, with taxpayer assistance, for lower-income households. This makes no sense for an economy that is trying to wean itself off of consumption and real estate and at the same time put overextended household balance sheets on a better footing. The Bank of Canada is trying its best to foster a rotation toward capital investment and exports and there was nothing in the budget to reinforce that rebalancing effort.
The bottom line is that Canada’s productivity performance and competitive standing relative to the United States, in particular, are abysmal and Ottawa decided to sidestep these issues in order to buy votes for the October election.
Deficits of slightly less than 1 per cent of GDP hardly seem dangerous, but we are 10 years into the cycle – at or near full employment – and, as such, we shouldn’t be running deficits at all. On a cyclically adjusted basis, the budget gap is far higher than the posted ratio. This acceptance of deficit-finance, at the late stage of the cycle, is exactly what happened in the late 1960s under Pierre Trudeau, the current Prime Minister’s father.
Indeed, deficits started off benign at around 1 per cent of GDP, then the recession effects took hold and by the mid-1970s that deficit ratio breached 3 per cent, a threshold, it turned out, we wouldn’t see again in 20 years. Not until 1994 did it manage to fall below 4 per cent, and that exacted a big cost in terms of domestic demand growth.
And don’t buy into the argument that interest rates are now low, so go ahead and raise debt. Rates were low in the late 1960s and the bright lights in the same Liberal Party back then also used that as a rationale to maintain deficits.
Finally, it is a commentary on the blasé public attitude toward fiscal concerns that so few are up in arms over what just happened. First, as mentioned, the balanced budget that the government previously pledged for this coming year is a clear and deliberate broken promise. This isn’t 2008-09, when a recession-bound economy required heavy doses of stimulus. Second, Ottawa has managed to find $9-billion in the revenue pool it wasn’t expecting three years ago. Instead of that extra revenue coming back to taxpayers or used to balance the books, the government instead has lifted program spending by some $15-billion for the coming year above the forecast it published back in 2016.
Incredible, indeed. We’ll see whether the Conservatives will be able to do anything with this during the election campaign.
David Rosenberg is chief economist with Gluskin Sheff + Associates Inc. and author of the daily economic newsletter Breakfast with Dave.