Morneau’s budget will be based on two-month-old survey in spite of recent, rosier economic data

TheGlobeAndMail.com
March 2, 2017
Bill Curry

The Liberal government’s 2017 budget will be based on a two-month-old survey of private-sector economists in spite of increasing signs lately that the Canadian economy is doing better than expected.

Federal budget forecasts are based on a survey of economists that is usually conducted about a month ahead of time. However, Finance Minister Bill Morneau made the unusual move of meeting with economists on Jan. 13, a month earlier than the previous year, to discuss their numbers.

That led to speculation the budget would be early, but February came and went and Mr. Morneau has still not announced a date. Statistics Canada said on Thursday that Canada’s gross domestic product grew at an annualized 2.6 per cent rate in the fourth quarter of 2016, which beat economists’ forecasts.

As a result of that and other data, some economists are projecting stronger growth for 2017 than they were at the time of Mr. Morneau’s January survey. However, Mr. Morneau’s office confirmed to The Globe and Mail on Thursday that the budget will be based on the January numbers.

“We remain confident that their survey is a reasonable basis for planning,” said Daniel Lauzon, a spokesman for Mr. Morneau. Government officials appear to believe that while the economy has shown signs of improvement since the survey, economists have also warned Canada faces considerable uncertainty in the coming year over policy changes in Washington under U.S. President Donald Trump.

Economist Randall Bartlett said Thursday’s GDP figures will likely translate into about $1.5-billion more a year in federal revenue than would have been expected just a month ago. That will not be reflected in the budget because of Mr. Morneau’s decision to stick with the January survey.

“The forecast is going to be somewhat outdated,” said Mr. Bartlett, who is with the University of Ottawa’s Institute for Fiscal Studies and Democracy. As a result, any boost to economic growth will not be reflected in Ottawa’s fiscal forecasts until Mr. Morneau’s 2017 fall update. Mr. Bartlett said it is not clear why Mr. Morneau conducted the survey so early this year, but added that it likely would have been technically challenging to include Thursday’s GDP figures in a budget that could be released in a few weeks.

Thursday’s figures revealed the Canadian economy grew 1.4 per cent in 2016 – which is exactly what private-sector economists had estimated in the budget survey that year. They lowered their forecast to 1.2 per cent later in the year, before Mr. Morneau released his fall economic update.

That update also projected 2 per cent growth in 2017 and 1.8 per cent growth in 2018. Some bank economists signalled on Thursday they will revise their longer-term forecasts in light of the more positive year-end results for 2016.

Economic data that beat private-sector forecasts is a rare development for the Liberals, who have blamed the fact that the economy has repeatedly underperformed expectations for the government’s growing deficits.

“I think it’s going to be a very welcome surprise,” Mr. Bartlett said.

Bank of Montreal chief economist Doug Porter said on Thursday that he was revising his 2017 growth forecast to 2.3 per cent – up from 2 per cent – based on the latest Statistics Canada data. Inflation is also stronger than expected, which helps Ottawa’s bottom line. He said those factors would mean at least an additional $1.5-billion in federal revenue.

“It doesn’t move the needle in a giant way, but it certainly tilts it in the right direction,” he said. Mr. Porter said he can understand why the government may wish to be cautious before adopting the slightly improved forecasts.

“I mean, we may be wrong in terms of upgrading the forecast,” he said. “But it just seems that with a bit better of a U.S. backdrop, a bit better of a global backdrop and relatively stable oil prices in the low 50s, that the overall environment for Canada has notably improved in the last six months.”

Since the 2015 election, Mr. Morneau’s fiscal updates have repeatedly announced a worsening landscape for federal finances.

The Liberals campaigned on a pledge to cap deficits at no more than $10-billion, but Mr. Morneau announced two months after the election that the financial situation was worse than he expected. By the time of his 2016 budget, projected annual deficits had grown closer to $30-billion.

The Nov. 1, 2016 fiscal update revealed the bottom line had worsened further, eating up all of the $6-billion a year the government included in its forecast to cover unforeseen events. A December report from the Department of Finance followed, announcing Ottawa was on track to run deficits until the 2050s.

Mr. Morneau’s 2017 budget will be his next opportunity to update his deficit forecasts and weigh in on whether he will take action to balance the books ahead of that current trajectory. The Liberal Party platform had promised a return to balance in 2019.