Canada takes economy headon with C$120 billion in deficits

Bloomberg

As an opposition lawmaker in Canada’s parliament seven years ago, Justin Trudeau criticized former Prime Minister Stephen Harper for making government “totally absent from the defining issues of our time.”
In his first budget as prime minister released on Tuesday, Trudeau put the federal government back at the center of the nation’s economy with almost C$120 billion ($92 billion) in accumulative deficits and the biggest jump in spending since the 2009 recession.
Canada is ramping up benefits to just about everyone — veterans, unemployed, aboriginals and families — allocating billions more in infrastructure, topping up funding for climate change initiatives, raising taxes on the rich, and cutting taxes for everyone else. The final outcome will be spending levels, and deficits, not seen in decades outside of the 2009 recession, all to wide acclaim from investors and stakeholders looking for new ways to kick start an economy rattled by an oil shock.
The budget is chock-full of red. Trudeau will run deficits of C$29 billion over the next two years with no forecast to balance the books over the next five years. About C$50 billion of the accumulative deficits are due to new measures and the rest reflect the impact of a worsening economic outlook. Canada will issue C$133 billion in bonds this year in part to finance these deficits, 30 percent above the previous record set in 2009 after the global recession.
Within just a few months, Canada has gone from being one of the world’s most fierce advocates of fiscal discipline to one of the most vocal advocates for deficits.
“This could be a test case for the rest of the world. People will say: ‘Look at what Canada did,’” said Darcy Briggs, a portfolio manager at Franklin Bissett Investment Management in Calgary. “If it works, then maybe these ridiculous negative interest rate experiments will end. You’ll get a normal rate of interest, and the federal coffers will actually start to be better utilized.”
According to the Bank of Nova Scotia, annual program expenses are projected to grow by C$52 billion in five years, 10 times the increase for the previous five years. As a share of gross domestic product, program expenses will rise to 14.6 percent in 2017, levels that in 1995 were deemed too high to be sustainable. Trudeau, swept to power in October, had faced calls from some economists for even more new spending to take advantage of interest rates that are near historic lows as monetary policy loses its bite.
While the measures detailed on Tuesday are forecast to give the economy a 0.5 percent bump in 2016, the Liberals steered clear of loftier deficits.

Not Doubling Down
“For those looking for the government to double down on earlier stimulus pledges, they will be disappointed,” National Bank Financial Economist Warren Lovely said in an interview. “It’s stimulus on a modest — to at most moderate — scale. This isn’t shock and awe fiscal stimulus.”
The government decided to provide some element of discipline, largely by keeping debt to GDP within striking distance of current rate of 31 percent. What’s more, the budget builds in a cushion of C$6 billion a year to account for risks that growth fails to meet forecasts. If the economy outperforms, the deficits could be shaved accordingly, making it easier for the government to return to balance.
“We want to get back to a balanced budget,” Morneau said in an interview with Bloomberg TV Canada. “We think with the growth that we can see, that we can get there in about five years or so.”
Much of the change in thinking reflects the economic angst of a country that was an economic juggernaut not too long ago, emerging from the 2009 recession as one of the most robust economies in the western world. The collapse in oil prices is now adding to the appeal of more activist federal government and the income redistribution championed by Trudeau, aided by record low borrowing costs that have raised worries about the effectiveness of monetary policy.
The economy is expected to post its second-straight year of sub-2 percent growth in 2016, or about 1.4 percent. 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.
“Canadians understand that a country can’t cut its way to prosperity,” according to the budget. “The government understands that hard work alone is not enough. A new approach — one that includes smart investments and fair choices — is needed.”

Child Benefits
The cornerstone of Trudeau’s budget is an overhaul of child-benefit payments, with a net cost of C$4.5 billion in 2016-17, which the government expects will lift 315,000 children out of poverty in what Morneau called the “most significant social policy innovation in a generation.” Canada will also provide C$8.4 billion over five years in new funding for its indigenous communities.
Trudeau has also pledged C$4.6 billion over three years — including C$3.7 billion that the budget books in the fiscal year that ends March 31 — in new funding for war veterans.