'The adverse effects of the shock," said the Bank of Canada in releasing the results of its Business Outlook Survey on Monday, "are increasingly being felt across most regions and sectors." That shock is, of course, low oil prices. On the plus side, most Canadian firms expect their sales to rise modestly this year, and companies outside the commodity sector are seeing exports pick up, thanks to a lower Canadian dollar. At the same time, however, business investment and hiring intentions are at their lowest level since the end of the Great Recession, thanks to the oil price shock. In layman's terms, the not-quite-in-a-recession Canadian economy is somewhere between middling and mediocre. The country's economy is in a funk. All of which raises some big questions for Finance Minister Bill Morneau.
Mr. Morneau is busy conducting pre-budget consultations – he was in Halifax on Monday – for a budget whose revenue projections look very different from those the Liberals were plugging into their election platform only a few short months ago. He says, not surprisingly, that the platform of lower middle-class taxes, bigger child-care benefits and higher infrastructure spending is more needed than ever, and will help a struggling economy.
He's absolutely right – in part. But some of the Liberals' promises need to be revisited, and recalculated.
The Liberals rightly broke the great deficit taboo during the last election. They promised to increase infrastructure spending by running deficits, with a plan that could largely pay for itself, thanks to record-low interest rates. The Liberal gamble was a winner politically, but they've also got a strong case economically. So long as the economy continues to grow, even modestly, Ottawa's relative level of indebtedness, the debt-to-GDP ratio, will continue to fall even with deficits of as much as $20-billion or so.
However, much of the new spending promised in the Liberal platform is not one-off infrastructure spending. It's ongoing, permanent social spending. The gap between government revenues and expenditures will grow thanks to a boost in transfers to Canadian parents and a tax cut for the middle class. Departments such as Indigenous and Northern Affairs have been promised significant new funding. Is it possible for the government to keep all of these commitments? Even if it blows off its election promise of annual deficits worth no more than $10-billion, as Mr. Morneau has hinted? Barring a suddenly stronger economy, the answer is likely no.
As the old saying goes, to govern is to choose. To satisfy a pledge to strengthen the economy by building more infrastructure while running modest deficits, Mr. Morneau and the government are going to have to take a hard look at some of their other promises.