Trudeau’s first budget aims to spur growth with $29-billion deficit

Theglobeandmail.com
March 23, 2016
By Bill Curry and Robert Fife

Bill Morneau’s first budget opened the spending spigot after years of federal restraint, delivering billions for cities, First Nations, families and the elderly.

But the Finance Minister now faces concern that he’s plunging Ottawa into deep deficits - $29.4-billion in the first full year - without a clear plan to return to surplus.

At the heart of the inaugural budget under Prime Minister Justin Trudeau is a gamble that the more progressive-minded economists are right: Directing billions toward the middle class and the less fortunate will ultimately lead to stronger economic growth, delivering broad-based gains for Canadians. If that happens, Liberals hope to create more than 100,000 jobs, boost economic growth by one per cent and potentially erase the deficit in time for the next election.

Given the uncertainty in the global economy, it’s a big challenge. The plan also marks a stark change of course. The Conservatives returned the books to balance last year and, with just two months left in the current fiscal year, Ottawa is still in surplus even though the Finance Department projects the year will end with a small deficit.

While the Conservatives and NDP pledged balanced budgets, the Liberals won power with a campaign that promised new spending based on four years of deficits totalling $26.1-billion. Now in office, the Liberals are budgeting for five years of deficits totalling more than $113-billion, arguing the economy is in worse shape than when those original promises were made.

The deficit is projected to decline to $17.4-billion in 2019-20, when Canadians return to the polls. The yearly deficit figures include $6-billion a year in adjustments for risk, leading many analysts to describe the forecasts as cautious targets that the government should be able to beat through stronger economic growth.

More spending may still be on the way. The Liberals have laid out an aggressive agenda over the coming year that could lead to further measures in the government’s second budget. Liberal plans for the future of health-care transfers, an innovation agenda, climate-change plans and tax reform are all subject to further discussion and negotiation before details are announced.

“This budget puts people first and delivers the help Canadians need right now,” Mr. Morneau told the House of Commons. “It is an essential step in a sustained and strategic effort to restore prosperity and optimism.”

When measured as a percentage of the economy, the size of the debt is projected to decline slightly.

“With the growth we hope to achieve, we believe we can get back to a balanced budget over time,” Mr. Morneau told reporters, later specifying that the budget could be balanced within five years.

Rona Ambrose, the interim Conservative leader, disagreed. She labelled the budget a “nightmare scenario” of out-of-control spending. NDP Leader Tom Mulcair said the budget’s Employment Insurance reforms fall short of what is needed.

The plunge in oil prices and reduced demand for Canadian commodities as a result of the global economic slowdown has left tens of thousands of workers without jobs. To help these displaced workers, Ottawa is extending EI benefits in 12 hard-hit regions in Alberta, Saskatchewan, Northern Ontario and Newfoundland and Labrador.

Alberta Premier Rachel Notley said she was cautiously optimistic that the budget will be good for her province, but she voiced her disappointment that unemployed workers in Edmonton were exempt from targeted EI changes that would allow unemployed Albertans elsewhere in the province to collect as many as 20 additional weeks of benefits.

“We’re disappointed that Edmonton is not included in the changes. We will keep a sharp eye on the state of job loss in Edmonton and we will continue to push for changes, should the situation worsen,” she said.

The budget implements the main elements of the Liberal Party’s election platform. But there are changes in timing as it relates to infrastructure spending, taxation and EI reforms.

The Prime Minister promised “historic investments” to First Nations and the budget followed through with $8.4-billion for education, housing and clean drinking water.

A promised gradual reduction of the small-business tax from 11 per cent to nine per cent will stop at 10.5 per cent, a surprise move that drew criticism from the Canadian Federation of Independent Business.

One of the big-ticket items in the budget is a new $23-billion Canada Child Benefit that folds existing programs into one single payment that is projected to lift 300,000 children out of poverty by next year.

For higher-income families, however, the income-tested benefit will phase out more quickly than promised.

The single elderly poor will also see a 10-per-cent increase in the Guaranteed Income Supplement that the budget predicts will help 900,000 seniors.

The Liberals have set aside $11.9-billion for public transit, affordable housing, waste-water systems, and $3.4-billion to upgrade parks, harbours, border crossings, federal airports and to clean up contaminated sites across the country.

“Studies consistently show that when there is slack in the economy and interest rates are low, for every dollar a government spends on infrastructure, substantially more than $1 of economic activity is generated,” the Finance Minister said.

However Mr. Morneau’s own department points out there is no guarantee that new spending will grow the economy by as much as expected.

“It should be noted that there is some uncertainty, and debate, surrounding the size of fiscal multipliers,” the budget notes in an annex.