The most generous thing that might be said about Bill Morneau's second budget is that the Liberals have adopted a do-no-harm approach as they await the crystallization of U.S. President Donald Trump's trade, tax and spending plans. Such is the stand-pat nature of this budget that the Finance Minister hardly needed new shoes, since he's covered so little ground.
A harsher assessment is that – barely 18 months into their mandate – the Liberals are stuck. They can neither move ahead with their progressive agenda – all Mr. Morneau's recent talk about soaking even more the rich turned out to be just talk – nor turn off the spending taps they opened last year, lest they repudiate more or less everything they proclaim to stand for.
The result is a fiscal plan that carries more downside than upside risk, with Mr. Trump's still undetermined trade and tax policies looming like a sword of Damocles over Canada's economy, and the growing probability of a course correction by Mr. Morneau once the axe finally falls.
The net fiscal impact of the measures announced in Wednesday's budget amounts to $5.7-billion over six years, not even a rounding error amid the more than $2-trillion in federal spending that will go out the door over that period. The penury of new spending should not be confused with restraint on Mr. Morneau's part, since the big expenditure plans announced last year are still set to go ahead. There is still no timeline in place for eliminating the deficit, which will clock in at $28.5-billion in 2017-18.
Indeed, including a $3-billion annual contingency, deficits going ahead will be somewhat higher than those forecast in Mr. Morneau's fiscal update in fall of 2016 – and that's before undertaking any new defence spending demanded of Canada by Mr. Trump. The federal debt will still increase by $120-billion, or 19 per cent, by 2022 to $757-billion.
Debt as a proportion of gross domestic product will fall slightly, to around 31 per cent, though it would not take much to go wrong to blow Mr. Morneau's "fiscal anchor" of a stable debt-to-GDP ratio out of the water. A mere 0.5 percentage point drop in nominal GDP growth relative to the budget's forecasts would add $6.2-billion to the annual deficit and send the debt-to-GDP metric higher by two percentage points. The Liberals should be preparing for rainier days. Mr. Morneau has already twice revised downward his projections for economic growth from last year's budget, based on the consensus view of private-sector economists. Though recent indicators have been more encouraging than expected, there are big clouds on the horizon in the form of weakening oil prices, rising protectionism and Trump-led geopolitical chaos.
And what of the much-hyped promise to retool Canada's innovation strategy? The vision outlined in Wednesday's budget is more warmed-over management consultant jargon about creating superclusters. There is some new money for venture capital and advanced manufacturing. The Liberals will review intellectual-property policies and launch a new "strategic procurement" strategy. They will consolidate existing assistance programs for the aerospace, defence and auto industries into a single Strategic Innovation Fund, increasing the total amount available by $200-million over five years. This is tinkering, not transformative change. The budget whacks another Tory-era boutique tax credit, killing the Public Transit Tax Credit, which the Liberals insist did little to boost ridership or cut carbon emissions. But how this squares with the Liberal boilerplate about easing "middle-class struggles" is a mystery. The wealthy don't take the bus. The soak-the-rich rhetoric is paid lip service with stepped-up efforts against tax evasion. The budget optimistically predicts this will yield a cumulative $1.9-billion in additional revenue by 2022, which is a bigger bang for the buck than other governments get. The budget is silent on asset sales, leaving open the option of privatizing Canada's airports. But to put federal finances on a more sustainable long-term track, Mr. Morneau should reconsider his government's move to abandon Tory plans to raise the retirement age to 67 by 2023, though such a climb down does not appear in the cards. Elderly benefits are Ottawa's biggest single expenditure, costing $51-billion this year, a sum projected to rise to $64-billion by 2022. Old-age security expenditures are rising at 5.7 per cent a year, far outpacing nominal GDP growth.
Normally, a stand-pat budget would inspire yawns. This one just creates anxiety.