Finance Minister Bill Morneau will release the Liberal government’s pre-election budget on March 19, as he faces calls from economic experts to keep provincial debt loads in mind when Ottawa updates its financial course.
Mr. Morneau announced the budget date in the House of Commons Wednesday and is scheduled to meet with private sector economists on Friday in Toronto for a final check in on the state of the Canadian economy.
The Finance Minister said the budget will address skills training, the housing needs of millennials, seniors’ issues and the cost of prescription drugs, but he declined to provide further details.
“We believe it’s very important for us to continue to be fiscally responsible and that will be demonstrated in our budget,” he said.
In an interview, former Bank of Canada governor David Dodge said Mr. Morneau should be mindful of the fact that Ontario and Quebec are carrying heavy debt loads and Alberta continues to deal with large deficits caused by a struggling energy sector.
As a result, he said the federal government should prepare for the possibility that, in the event of a recession, Canada’s largest provinces won’t be in a position to stimulate the economy with tax cuts and more spending, and the pressure will be on Ottawa to carry a heavier load.
“They should keep their powder dry at this point. It may well be a year from now that they need to take some discretionary action if things go bad,” Mr. Dodge said.
The Finance Minister’s fall update projected this year’s deficit will be $18.1-billion, followed by a $19.6-billion deficit in the 2019-2020 fiscal year.
Mr. Dodge said Ottawa should avoid going any further into deficit. That would mean less opportunity for major new spending announcements in an election year, but Mr. Dodge said some level of restraint could still be a popular move.
“The lessons are, I think, that good fiscal management is actually quite good in terms of electoral politics as well. I think we’ve learned over time that citizens are not stupid. They don’t fall for giveaways, which they know governments cannot do or can only do by coming back later and taking it back in one way or another.”
The former central bank governor co-authored a paper this week for law firm Bennett Jones that outlined the fiscal situations facing provincial and federal governments this budget season.
Mr. Dodge was an influential voice in 2014 when he argued that it would be good economic policy for Ottawa to run small deficits provided that the debt remained stable as a percentage of the economy and that the deficits were used to finance new infrastructure that boosts productivity.
The Liberal Party promised exactly that in the 2015 election campaign and referenced Mr. Dodge’s comments in the party’s platform. However in government, the Liberals will not erase the deficit by 2019 as promised and the infrastructure spending has been slow to get out the door.
“I’m a little disappointed,” Mr. Dodge said when asked to assess how the Liberals have delivered on their platform pledges. “I’m not surprised, because it’s very hard to do, to get the big stuff, important stuff, planned and executed in a short period of time. … What I think bothers me more is much of what they have got done and is now in the process of being executed is not the big stuff; it’s a lot of little stuff and I think that is a problem. The feds really have some important national goals to achieve that they haven’t been driving toward.”
CIBC chief economist Avery Shenfeld said that Mr. Morneau should “play nice” with the provinces by not moving too aggressively on the federal deficit at a time when large provinces are cutting back.
“By continuing to live with a deficit of roughly 1 per cent of GDP, rather than aiming at a quick return to balance, the federal government would avoid adding to the drag on Ontario, particularly if that includes funding for much needed provincial infrastructure,” he said in a research note this month.
“The Bank of Canada can also choose to play nice with Ontario and other deficit-slashing provinces. The more Ontario and other high-deficit provinces opt to tighten their belts, the easier the course Governor [Stephen] Poloz should take for interest rates as an offset,” he said.
The Globe and Mail, February 21, 2019