The recent federal budget delivered a significant share of the policy-change agenda promised by the Liberals during the 2015 campaign. It also had aspirations to underpin and strengthen economic growth as the overarching objective. With that goal in mind, there are four dimensions of the budget that could potentially have a positive impact on that aim.
The first and most immediate dimension is the short-term stimulus effect. Although the national economy is not in recession, recent growth has been feeble and an increase in net government spending can add to short-term economic growth. The Conference Board of Canada had anticipated fiscal stimulus measures in its economic forecast; we expect the full budget measures to boost our current outlook by a further 0.2 percentage points in 2016 and 0.1 points in 2017.
Second, there is the redistribution effect of shifting purchasing power toward those who will spend the money, not save it. Several measures in the budget provide more purchasing power to lower- and middle-income Canadians, notably the new Canada Child Benefit, increases to employment insurance benefits in specific affected regions, and a modest top-up to the guaranteed income supplement for single seniors. Spending power is also being shifted via a cut to the middle-class income tax rate on incomes between $45,282 and $90,560 (with a significant tax increase on earnings exceeding $200,000).
If middle-class earners make use of the added income by spending it – as is likely – that will provide a mild boost to consumption and short-term growth. Moreover, if they spend the money on goods and services with high domestic content, rather than on imports, this too could provide a mild boost to Canadian growth.
Third is the investment effect, specifically the commitment to spend much more on public infrastructure over the coming decade. Private-investment growth in Canada has been weak for a number of years and contracted by 8 per cent in 2015, largely due to the 40-per-cent reduction in oil-sector investment. We project private investment to contract again in 2016. Increased spending on public infrastructure would help to fill the hole left by weak private investment, at least in the near term.
Only Phase 1 of the government's infrastructure plan – to be spent on public transit, water and wastewater systems, and affordable housing – was outlined in the 2016 budget, which focuses primarily on the next two years. Infrastructure spending will grow by $5.3-billion in 2016-17 (about $500-million higher than previously announced) and $8.2-billion in 2017-18 (about $3.5-billion higher than announced).
As we have said on previous occasions, future federal infrastructure-spending plans should focus on projects that underpin Canada's long-term economic growth and should be developed and delivered in co-ordination with the provinces and cities. Defining a low-carbon economy should be a key factor guiding investment decisions and a meaningful portion of infrastructure funding should be directed toward indigenous people.
Finally, there is the potential productivity effect of this and future budgets. By now, it should be well understood that demographic forces, specifically an aging work force, are having a negative impact on Canada's long-term growth potential. In theory, faster productivity growth and stronger private (and public) investment could counteract demographic trends, but Canada's track record on productivity growth over three decades is very poor. Canada also has a weak track record on innovation, a key component of productivity growth, where Canada received a "C" grade in the latest Conference Board report card on innovation.
It is far from clear how this budget will have a meaningful impact on boosting Canada's productivity performance. The budget barely scratched the surface of areas that could affect long-term productivity growth, such as broad tax reform, investment in advanced education, or innovation. Addressing faster growth in productivity through future budgets will be complex; simply increasing government spending will not improve productivity performance. There is no silver bullet in policy reform, and no guarantee of success. But unless we make a collective commitment to boosting productivity growth, it will be hard to sustain the short-term stimulus that's been added for 2016-17.
In sum, the first budget of a new government has done a number of things that should raise Canada's economic growth in the short term and shore up overall investment. Yet much more will be required in future budgets if Canada is to make a dent in the most challenging and important area of longer-term prosperity, productivity growth.
Glen Hodgson is senior vice-president and chief economist at the Conference Board of Canada.