Booming Canada lets Trudeau spend a bit more to fight anxiety

 25 Oct 2017 - 22:28

Booming Canada lets Trudeau spend a bit more to fight anxiety
Canada's Finance Minister Bill Morneau receives a standing ovation before delivering the Fall Economic Statement in the House of Commons on Parliament Hill in Ottawa, Ontario, Canada October 24, 2017. Reuters/Chris Wattie

By Josh Wingrove / Bloomberg

A strong economy has helped Prime Minister Justin Trudeau whittle down Canada’s projected budget deficit, providing enough wiggle room to boost transfers to low-income Canadians.

The Liberal government cut its deficit projection for the fiscal year ending March 31 to C$19.9 billion ($15.7 billion), down from C$28.5 billion in the March budget, figures released Tuesday show. It also introduced C$7.7 billion of new spending over six years.

Canada’s economy is expanding faster than any country in the Group of Seven, and is projected to grow 2 percent on average over the next five years, up from the previous estimate of 1.8 percent. Despite the new spending measures, government expenditure as a share of the economy is still projected to fall as Trudeau moves to offset austerity by boosting transfers to lower-income earners.

“What you saw in Canada, not unique to industrialized countries, was a sense that people were concerned they were falling behind,” Finance Minister Bill Morneau said in an interview in Ottawa after delivering his Fall Economic Statement. He said Canada’s measures were aimed at alleviating anxiety and making lower-income earners feel “more confident in the economy.”

“We’ve ended up, two years in, with growth rates that are significantly better than all our G-7 peers,” Morneau said. The new measures bring total spending since the March budget to C$19.1 billion over six years, or less than 1 percent of gross domestic product.

Morneau demurred when pressed on whether he should be pushing for a surplus to save for a rainy day, saying strong growth has made the economy more resilient to events such as the possible collapse of North American Free Trade Agreement talks. The U.S. is by far Canada’s largest trading partner.

Trump, Nafta

“By being fiscally responsible, we think we are resilient to rise up to those challenges,” Morneau said. While the Nafta talks are important, he said tariffs are relatively low and bilateral trade will “continue under any scenario.”

With the Bank of Canada already raising interest rates to slow growth, Morneau downplayed the impact his expanded transfer payments may have on monetary policy.

“We don’t see it that way,” he told reporters, adding programs that transfer wealth to lower earners are driving Canada’s growth and have “paid us back in spades.” Governor Stephen Poloz’s next rate decision is due Wednesday.

“There will be of course an ability for people to put more money into the economy, but what we know is that if we don’t deal with that middle class anxiety, then we’ve got a much greater challenge,” he said. “It has some impact on the economy, but we think that’s the right balance to get to so that we can help those families.”

Risk Adjustment

The Trudeau government announced Tuesday that it would index its marquee Canada Child Benefit to inflation beginning in July 2018, two years earlier than scheduled. That will cost C$5.6 billion over five years. It also expanded the Working Income Tax Benefit for low income workers, beginning in 2019.

Even with the improved economic outlook, there’s no forecast return to budgetary balance, which Trudeau campaigned on in 2015. The government will proceed with a new tax on investment income held in private corporations that it will detail in next year’s budget. Canada’s economy will expand 3.1 percent in 2017 and 2.1 percent in 2018, Tuesday’s projections show.

The 2017-18 deficit number includes a reduction in the risk adjustment, to C$1.5 billion from C$3 billion, at the halfway point of the year. The risk adjustment cushion remains at C$3 billion in coming years. Tuesday’s statement shows the deficit declining to C$12.5 billion by 2022-23, the last year of the projection.

Debt Ratio

The ratio of debt to GDP, the Trudeau government’s last remaining fiscal anchor, is forecast to fall to 29.5 percent by 2020-21, compared to the 31.3 percent forecast in the spring budget, and to 28.5 percent by 2022-23. That would be the lowest level since 1977, Morneau said.

“Despite the deficits expected throughout the horizon, debt will still be falling as a percentage of GDP and be very low by the standards of most other developed countries,” CIBC Senior Economist Andrew Grantham wrote in a research note.

Trudeau’s team has backtracked on a trio of tax proposals unveiled by Morneau in July, but offered new details Tuesday. The government will proceed to restrict so-called income sprinkling -- paying family members who don’t work for a firm -- with new legislation due later this year. That’s expected to raise at least C$215 million annually beginning in 2018-2019.

The Liberals will also press ahead with taxing investment income held in private corporations when it exceeds C$50,000 annually, and release rules for that in its 2018 budget. It has abandoned proposed changes to capital gains tax rules.