Ottawa in line for billions in ‘fiscal gravy’ as economy perks up

TheGlobeAndMail.com
June 15, 2017
Michael Babad

The federal government is suddenly looking at billions of dollars in “fiscal gravy” as the economy perks up.

What to do with those billions is a question, particularly given the uncertainties still facing Canada. Regardless, says National Bank of Canada, Ottawa is in a nice place with stronger buffers.

“Canada’s surprisingly robust expansion gives the federal government greater latitude to meet/beat official budget targets or combat economic dangers than was envisioned only three months ago,” Warren Lovely, the bank’s head of public sector research, said in a report that examines Ottawa’s fortunes.

Mr. Lovely calculates that the stronger economic outlook could mean $3.5-billion more in fiscal 2017-18, with a net improvement to the underlying budget balance of $5-billion a year by 2019-20. That, by the way, takes into account the higher interest rates the Bank of Canada is now pondering.

“Those fiscal adjustments control for a back-up in interest rates (including the growing likelihood of near-term BoC tightening), which would be expected to go hand in hand with steamier growth and an evaporating output gap,” Mr. Lovely said.

“Think of this as fiscal gravy, in that it’s incremental to the $3-billion/year the federal government already has set aside in an ‘adjustment for risk.’”

There’s a lot to consider since the assumptions made in the last budget, from better economic growth projections to strong job creation to the central bank signalling just this week that higher interest rates may not be as far off as some observers had believed.

“Fortunately, Canadian data have tended to surprise in all the right ways since federal-provincial budgets were presented earlier this year,” Mr. Lovely said.

“Indeed, since early February – when New Brunswick kicked off the 2017 budget season – no major country or economic region has enjoyed as positive a string of economic surprises as Canada.”

As for how that money could be used, the government certainly faces some “immediate pressures,” such as aid to Ontario and Quebec from flooding and to a lumber industry slapped with U.S. countervailing duties, Mr. Lovely said. He noted, too, priorities such as military spending.

“It’s admittedly a bit early for pre-election goodies, given that the next federal election isn’t scheduled until October, 2019, but one could well imagine Bill Morneau fielding any number of funding requests from his Cabinet colleagues,” Mr. Lovely said of the Finance Minister.

“The point is, there’s no shortage of spending priorities, alongside a potential need to adjust our tax rates to ensure global competitiveness,” he added.

“Meanwhile, one need appreciate that it’s still quite early in the fiscal year. There’s still ample uncertainty attached to the economic outlook. Oil remains a bit of a problem and one could rhyme off a host of additional risk factors at home (e.g., overheated housing or abroad (e.g., Trump policy uncertainty), which argue for continued prudence.”