For years, the Harper government has hitched Canada's economic fortunes to the willingness of Canadian consumer to spend. Why change now?
The budget tabled by Finance Minister Joe Oliver on Tuesday isn't about a grand vision for Canada's economic future, a long-term master plan for cashing in on the benefits of a hard-earned balanced budget by using that flexibility to build a new architecture for prosperity and growth. It's about making sure the balanced budget itself is achieved (as promised, and by whatever means necessary), and laying out the battle ground for the fall election. It's not about stimulating a stalled economy, but about stimulating the salivary glands for voters.
First, the balance. Yes, for the first time since 2008, the government is budgeting for a small surplus ($1.4-billion, which is little more than a rounding error on a $290-billion budget). To get there, it's cutting its contingency fund to $1-billion from $3-billion, in an uncertain economy that arguably calls for more wiggle room rather than less; it cashed in the shares in General Motors it acquired as part of the auto bailout during the financial crisis, to the tune of another $2.1-billion; and it's allowing the employment insurance account to move into a cumulative surplus for the next couple of years, which keeps another $1.8-billion in the government's pocket this fiscal year.
But hey, it's balanced. Don't knock it.
To the extent that there is a vision here for using fiscal policy to promote economic health, it is aimed largely at Canadian consumers. Yes, the same segment of the economy that kept the country afloat through the recession and took the lead in the recovery, the same households that have become disturbingly overburdened with debt, are receiving the bulk of the budget's incentives to keep their foot on the gas pedal.
The budget documents trumpet nearly $10-billion in "measures supporting jobs and growth" in the 2015-2016 budget year. Nearly 80 per cent of it comes in the form of tax cuts and credits for Canadian families. All other measures pale in comparison to the government's tax breaks for households.
As one of my colleagues was saying on the eve of the budget (a fun game for you – guess which one!) , the Harper Conservatives have thrived for years on giving an increasingly suburban Canada what it craves – money in their pockets and the freedom to accumulate stuff with it.
No surprise, then, that the way this government chooses to stimulate jobs and growth in the shadow of 2015's oil-soaked economic cloud is to hand money back to consumers, and trust them to spend it.
This is in lieu of the government's own direct contribution to Canada's economic activity. By its own calculation, Ottawa is spending $18-billion less in this budget than it otherwise would have without the series of discretionary spending cuts it has adopted since 2010. And constraint remained a prominent element in Mr. Oliver's comments Tuesday.
What it means is that at a time when economic growth is on very shaky ground, the government itself is contributing remarkably little to it. The Bank of Canada last week estimated that government contributed nothing to real gross domestic product growth last year, and will chip in only about 0.2 percentage points to the estimated 1.9-per-cent growth this year. Consumption, on the other hand, will deliver more than half of the forecast growth for 2015.
Indeed, the public sector's lack of visibility in Canada's economic growth picture is a significant contributing factor in the Bank of Canada's continued bargain-basement interest rates. As its restrained fiscal policy adds a bit more chill to a tepid economy, the central bank has continued to lean its own monetary policy in the other direction in order to stimulate with interest rates what Ottawa refuses to stimulate with fiscal investments. The result has been to add even more fuel to the consumer fire, as these long-term stimulative rates have encouraged record levels of borrowing by Canadian households.
The central bank has long flagged this as a significant risk to Canada's economic stability. But as long as Ottawa persists in leaning its spending policy the other way, what choice does it have? So consumers continue to spend and carry hefty debts, and the government adds more fuel to the consumer to kick the day of reckoning in the consumer economy a little further down the road.
Meanwhile, the government's zeal to maintain a balanced budget has the potential to further starve its growth contribution should its economic projections for this year prove optimistic. It hasn't given itself a lot of wiggle room, should things not go as planned.
While the budget outlines several key risks, all to the downside, for its economic outlook for the current year (including the potential for high household debt to constrain consumer spending, as well as the danger of further declines in the oil price and weaker-than-expected global growth), it not only reduced the size of its contingency fund, but priced in an "adjustment for risk" of just 0.3 per cent in its assumption for total nominal GDP – the key number for predicting government revenues. Should any of the risks come to pass, the government may well be tempted to pull back spending to keep its promise intact.
This budget came with a title "Strong Leadership," but in terms of delivering the growth the economy needs, it's clear who the government is expecting to lead. It's still relying on its voters to carry the spending ball, so it doesn't have to.