Budget built on cautious projections for economic growth: Ottawa

Theglobeandmail.com
March 23, 2016
By Bill Curry

The Trudeau government launched its sales pitch in support of a deficit-fuelled budget, insisting the budget could still return to balance if the plan succeeds in boosting the Canadian economy.

Ottawa says the budget is built on cautious projections for economic growth and that even small gains in the economy over the coming years could be enough to erase the deficit within five years.

The government received some good news on Wednesday in the form of a new quarterly economic forecast from TD Economics, which includes an upward revision of growth forecasts based partly on the budget, but primarily on more recent positive economic data, including trade figures.

TD raised its 2016 GDP forecast to 1.9 per cent from 1.7 per cent and its 2017 forecast to 2 per cent from 1.8 per cent. Those forecasts are significantly more positive than the forecasts used to underpin Finance Minister Bill Morneau’s budget numbers.

Canada’s growth rate is largely influenced by factors outside of Ottawa’s control, particularly the health of the U.S. economy, but economists say the budget measures will have at least a small positive impact on the economy over the coming years.

The budget’s bottom line includes a $6-billion-a-year adjustment for risk that has the effect of assuming growth of just 1 per cent in 2016. As a rule of thumb, the budget says a one-year, one-percentage-point change in GDP would lead to a $5-billion change to the bottom line.

The morning after the budget began with Mr. Morneau speaking to a business audience in Ottawa, while Prime Minister Justin Trudeau appeared as a radio guest with the CBC, a Crown corporation that received an extra $150-million a year in the budget.

Mr. Trudeau said recent history has shown that private-sector forecasts often overestimate future economic growth and so it makes sense to base the budget on a forecast that is below the consensus of economists. Stronger growth could lead to a balanced budget, but Mr. Trudeau argued against setting a hard target.

“When we look at what happens with greater growth in our economy is we get to balance in the coming five years. There is a track to that if we increase the growth in the economy. That’s why this budget is focused on creating growth,” he said.

He declined to make a clear pledge on when the books will be balanced.

“That depends entirely on the kind of growth that we’re investing in creating right now and how the economy responds. We’re being absolutely open and transparent with Canadians, the way we promised to be, not to try and force ourselves back to balance to keep an electoral promise but to respond to what the economy actually needs,” he said.

Mr. Morneau suggested that better-than-budgeted economic growth could be a source of funding for further measures that were mentioned in the budget but did not receive new money, such as ongoing discussions related to health care, innovation and defence.

The minister played down concerns about the plan to run a $29.4-billion deficit - three times the maximum size the Liberals promised during the election - insisting that with a boost in growth, the budget will return to balance in “approximately” five years.

“What we’re trying to do with Canadians is say we’re being very prudent in our estimates today and with the appropriate investments, we can have an improved situation tomorrow and that will allow us to lower our net-debt-to-GDP [ratio],” he said.

Neither Mr. Morneau nor the Prime Minister faced opposition questions related to their government’s first budget because the House of Commons adjourned early due to the sudden death of Conservative MP Jim Hillyer.

The House is scheduled to sit on Thursday before taking a two-week recess and returning April 11.

Derek Burleton, TD’s deputy chief economist, said the budget’s assumptions for growth are clearly below the current consensus forecast of private-sector economists.

“They’ve used some fairly cautious assumptions. I think they’ve set the bar low with the hope that the actual economic performance will leap above it, so that could give them more leeway,” he said in an interview. “They could find themselves ahead of plan and that could open the door to lower deficits or higher spending.”

Economists with Bank of America Merrill Lynch reported Wednesday that they were also increasing their projections for Canadian GDP growth - to 1.7 per cent for 2016 and 1.9 per cent for 2017 - partly because the budget will provide “marginally” more stimulus in the short term than expected. They also noted that the Bank of Canada’s forecast of 1.4-per-cent growth this year will likely be revised upward in light of the measures in the budget.

Bay Street economists had been encouraging the new government to run deficits over the coming years to spur economic growth, and those same economists were generally pleased with the Liberal plan.

However, some economists have reacted negatively to the size of the deficits and the lack of a clear plan to return to balance.

“Debt-to-GDP ratios make a lousy fiscal anchor. Many unforeseen factors could make the ratio rise rapidly,” Alexandre Laurin, director of research for the C.D. Howe Institute, warned in a written reaction to the budget. “The government is wrong to make the return to budget balance conditional on strong economic growth. Population aging is already taking its toll on long-term projections, and too many unforeseen events can derail the fiscal path.”