Bill Morneau hones Canada’s deficit pitch for bond investors

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For Canada’s Finance Minister Bill Morneau, tasked with selling his government’s new fondness for deficits, words matter. It’s not spending, it’s investment. Long-term beats short-term. Never use the word deficit, ever. Most important, growth is everything.
Since releasing his March 22 budget, Morneau has been on the road building the intellectual case for why he needs to run almost C$120 billion ($92.5 billion) in new deficits in six years. Much of it is timing. The conditions are ripe, he argues, for the country to abandon balanced budgets — temporarily — to drive up potential growth rates over the longer-term. It’s a simple cost-benefit analysis.
“First of all we don’t call it spending,” Morneau said in an interview on Wednesday with Bloomberg Television’s Erik Schatzker, after an editorial board in New York. “What we are doing is we’re making investments in the future of our country. We need to be doing things that are going to enhance our growth.”
Morneau understands investment. Up until winning office for the first time last year, the political outsider spent most of his adult life operating one of Canada’s largest human resources firms, Morneau Shepell Inc., founded by his father. He grew the business steadily, in part through acquisitions financed by debt, and was recruited into politics by Prime Minister Justin Trudeau.

‘Right’ Prescription
In the editorial board, Morneau never once used the words “deficit” or “stimulus.” The government’s fiscal plan is simply “the right policy prescription for the situation we were in,” almost as if, had things been different, there wouldn’t be any need for red ink.
The Liberals still plan to return the country to balance, eventually, with revenue levels little changed from where they are now. “What we’re saying is there is a path to a balanced budget that includes a higher growth rate,” he said.
Morneau is explicit on why now is the right time for deficit financing. Interest rates are low. Canada has the capacity to borrow given its low debt levels. The country has large infrastructure needs. Large swaths of the population whose incomes have lagged over the past decade are ready to spend if they only get a boost from government.
The country is also suffering from an era of low growth, with its economy projected to post its second straight year of sub-2 percent growth in 2016. That would mark only the third time the country has recorded back-to-back years of sub-2 percent growth since the end of World War II.
“We’re doing what we think we need to do in order to engineer that growth,” Morneau said. “We are making the investments right now in order to get us to the rate of growth that is better in the long term.”

Change in Tune
It’s been decades since a Canadian finance minister traveled to New York advocating deficit spending.
In an editorial board with Bloomberg in September 2014, then Finance Minister Joe Oliver said the country in fact needed the opposite — more fiscal discipline.
“We’d like to grow faster. We’re going to focus on creating more jobs, but the international financial environment is fragile,” Oliver said. “There are risks, particularly outside North America, and we have to remain fiscally responsible.” His Conservatives would go on to lose power to Trudeau’s Liberals in October’s election.
Global Resonance
To be sure, times have changed and the message of deficit spending is resonating in many policy circles — including at the International Monetary Fund.
And the country is hardly being punished by investors. The average yield of Canadian 10-year notes has fallen to 1.2 percent, from the average of 2.3 percent in the past five years. The Canadian dollar is the third-best performing major currency this year, and the country should return to being one of the fastest growing economies developed economies by 2017.
Morneau said he met with a group of chief economists from banks in New York and they were practically “uniform” in their support for the country’s fiscal policy.
“For investors, we know they want to see an economy that is going to grow at a healthy pace over the long term and that’s exactly what we are setting out to do,” Morneau said. “I’m confident investors, investors in Canadian bonds, are going to be supportive because we are going to enhance the long-term trajectory of our country.”

Road Ahead
While pledging to remain prudent in his budget planning, Morneau also makes clear that growth is paramount. He refused to rule out spending any unused portion of the government’s built-in C$6 billion contingency, should growth exceed its very conservative economic outlook.

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