When Finance Minister Bill Morneau unveils the Trudeau government’s first budget on Tuesday, economists will be the first in line wanting to learn the details. Not only will this be the first budget from a new government in nearly a decade, but it comes after months of speculation about how Trudeau and his team will follow through on their ambitious election promises, particularly at a time of weak economic growth.
For economists, the questions are many: How big will the deficit be? What will Ottawa’s spending plans look like? What programs or tax measures will be introduced, and which ones will be cut?
So in the countdown to budget day we asked several economists, from Bay Street and academia to think tanks and industry groups, to each share a chart that reflects something they will be watching for come Tuesday, and tell us why.
What’s the plan for direct program spending?
Stephen Gordon, Laval University
“The first chart I will be updating after the budget is released is the first one I’ve been updating for the past three or four budgets: direct program spending as a per cent of GDP. Rigorous control of direct program spending—that is, spending on wages, goods and services, and excluding payments made to individuals and other level of government—was the key to balancing the budget over the last five years. When the path was first laid out, I didn’t have much faith in the Conservatives’ ability to stick to the plan, but they surprised me.
What I will be looking for is what will replace that red line. The Liberals’ platform calls for three years of spending above the 2015 budget projection, followed by a reversion to the baseline in 2019-20. (Whether or not this will balance the budget is another matter, and depends largely on revenues.) Not all of this spending will necessarily show up in this chart; some infrastructure financing may take the form of transfers to the provinces. But I will be paying close attention to where the end point of the Conservatives’ baseline compares to where the Liberals plan to be in five years.”
How will Ottawa respond to provincial fiscal challenges?
Trevor Tombe, University of Calgary
“The federal government’s budget challenges are manageable. When measured as a share of the economy, the federal government will likely end this fiscal year with a stronger budget than all but two provinces (B.C. and Quebec). For the upcoming 2016-17 year, the deficit will grow. Slower economic growth, the Liberal’s “middle-class tax cut,” and planned spending increases all play a role. Overall, the deficit may come in around 1.5 per cent of GDP. This is large (worse than two-thirds of all federal and provincial budgets since 1980), but will likely decline soon after. Compare this situation to some provinces. For Alberta and Newfoundland, there’s no end in sight for their budget challenges. This puts pressure on the federal government to assist, either directly with infrastructure spending to offset provincial outlays or further direct transfers, or indirectly through changes in employment insurance or a host of other policy measures. In our federation, the fiscal challenges of one government can affect the others. Will the feds respond? And if so, how?”
Paying for progressive promises
Jennifer Robson, Carleton University
“The Liberals have staked out a pretty staunchly progressive position—even managing to outflank the NDP in the election. Their narrative in the campaign, repeated again in the Speech from the Throne, argued that “better is possible” and that government has a critical role to play in ensuring “fairness,” especially by “giving more direct help to those who need it.” I’ll be looking to see how the numbers move in a number of federal programs aimed at improving the welfare of vulnerable refugees, children in low income, unemployed youth, homeless persons and low-wage workers. The numbers in the chart are based on the projections already tabled by the government this year. The trend lines (measuring dollars flowing directly to individuals or to the organizations serving them) are pretty clear: mostly flat. Of course, that could change following the budget. On some programs (the Refugee Assistance Plan, the Youth Employment Strategy and the Canada Learning Bond), the government has made specific promises to do more. We’ll see how that shapes up in light of mounting fiscal pressures and far larger promises on infrastructure spending.”
Big deficits with no recession
Doug Porter, BMO Financial Group
“This is something we should be mindful of amid all the calls for the government to crank up the deficit (with some calling for $50 billion!). My chart looks at the year-to-year change in the budget balance, and I am assuming that the deficit will be announced at roughly $30 billion for the coming fiscal year (guessing just below that metric). The point is that this will be a very aggressive increase in the deficit, especially since we are not in a recession. The shaded liens are periods of U.S. recession (which are much better defined than Canadian recession periods).”
A vision for the size and role of government
Armine Yalnizyan, Canadian Centre for Policy Alternatives
“Size matters; but no matter how big it is, it’s what you do with it that matters most. Today the federal government plays a smaller role in the Canadian economy than it has in the past 60 years. Federal expenditures, including debt charges, account for only 14.2 per cent of GDP, having peaked at 24.9 per cent in 1982-83, in the midst of a recession.
Within a story of expansion then contraction, every regime change has put different emphasis on where to act: supports for individual Canadians (seniors, children and the unemployed); supports for provinces (for health, education, and social programs, as well as arrangements to equalize fiscal constraints in the federation); and directly delivered programs (from defence to First Nations, and much more). Charges on borrowing are at an all time low.
Budget 2016 represents another regime change, as the Liberals set out their vision for both the size and role of government.”
Keeping an eye on spending
Ted Mallett, Canadian Federation of Independent Business
“I’ll be paying close attention to the revenue numbers. As of February, the feds seem to have them constrained quite a bit below nominal GDP growth—in fact, outright negative. We would like to see a commitment to keep spending at planned levels, so that if revenues come in above target, the benefit shows up as a smaller deficit.”
A food rebate to help with rising prices
Mike Moffatt, Ivey Business School
“Low oil prices have brought down the loonie and caused a substantial increase in the price of imports. Although the rate of inflation has stayed near the Bank of Canada’s two per cent target, the price of fresh fruits and vegetables has shot up considerably as, like most commodities, they are priced in U.S. dollars and traded globally. This has made it difficult for low-income and fixed-income Canadians to maintain a healthy diet, a problem the government should consider addressing via a food rebate.”
A plan to return to a balanced budget
Craig Wright, RBC Economics
“In the interest of transparency, the fiscal narrative has been in a state of evolution, with fiscal numbers being revisited and revised on a couple of occasions. During the campaign a number of commitments were made with respect to the fiscal position and the outlook for the deficit over the government’s mandate. The plan articulated the first two years of moderate deficits followed by a plan to get back to balance by fiscal year 2019-20 while keeping the debt-to-GDP ratio on a declining trend. Recent updates and announcements have contributed to a much larger deficit profile over the near-term, potentially in the $25- to $30-billion range, alongside an apparent softening in the commitment to return to balance. An improving economic outlook, alongside an extremely large adjustment for risks, suggests the fiscal plan can include both short-term fiscal stimulus as well as a plan to return to balance over the medium-term. An explicit or implicit target of balance would restore a much-needed fiscal anchor to the plan.”
Ottawa can manage bigger deficits
Benjamin Tal, CIBC World Markets
“The point here is that you can run a budget deficit of $100 billion a year for a decade before you get to the level of debt-to-GDP we saw in the 1990s … so given this context the difference between a $30- or $40-billion deficit is minor.”
Don’t forget provincial debt
Paul Boothe, Ivey Business School
“Here is the chart that I will be watching. It is government debt-to-GDP, but looks at all government debt, not just federal. Lots of the analysis focuses on federal debt/GDP and we look quite good comparatively speaking on that metric. However, this ignores differences between federations and unitary states. I think we should be looking at what the budget says will happen to our total debt in comparison to, say, the U.S., U.K. and Germany. We have some room to borrow, but maybe not as much as some people think when they focus on federal debt-to-GDP.”
A fiscal package to boost growth
Jean-François Perrault, Scotiabank
“The Canadian economy is adjusting to lower commodity prices and is operating well below what the Bank of Canada considers to be its capacity. This suggests that policy support continues to be needed to help smooth this adjustment. Monetary policy has provided critical support to the economy thus far. While there remains scope for more accommodative monetary policy, all this would do is encourage households to borrow further and put downward pressure on the dollar. A properly designed and calibrated fiscal package could raise growth without encouraging households to incur more debt. Doing so could soften the blow to the parts of the country most negatively affected by the decline in commodity prices by facilitating their adjustment, allow the economy to return to its full potential sooner than implied by current forecasts, and provide insurance against the significant downside risks to the global economy.”
Ottawa should move to regulate assisted reproduction
Lindsay Tedds, University of Victoria
“The first babies conceived through in vitro fertilization in Canada were born nearly 34 years ago, on March 25, 1982. Since that time, demand for assisted reproduction treatments has grown as the prevalence of infertility in Canada has risen: from five per cent in 1984 to 16 per cent by 2010. The number of fertility clinics and the number of treatment cycles have increased exponentially over this time period as has the prevalence of multiple births. As shown in the graph, the natural rate of multiple births is about 1 in 89 birth (~1.1 per cent), whereas in the multiple birth rate in Canada is currently about 1 in 30 (3.3 per cent). Further, data from the Canadian Fertility and Andrology society shows that the multiple birth rate from in vitro fertilization treatments in Canada without regulated embryo limits was around 30 per cent. Multiple births are both risky and costly, not only to the parents but also to the health care system and to the babies themselves. The federal government has shown little leadership with respect to infertility, assisted reproduction treatments, and the growing multiple birth rate in Canada. The Canada Health Act remains silent about these treatments and the federal government’s sole attempt to regulate the industry through the passage of the Assisted Human Reproduction Act in 2004 was immensely unsuccessful, being largely struck down by the Supreme Court in 2010. To date only Quebec and more recently Ontario have attempted to partially regulate the industry through embryo transfer limits. The issue of infertility, assisted reproduction treatments, and the growing incidence of multiple births needs a fulsome and national discussion in this country and the longer the federal and provincial governments ignore this significant reproductive issue, the costlier it will become.”
Imbalances in how Ottawa taxes corporate distributions
Kevin Milligan, University of British Columbia
“When companies make a profit, they can either retain the earnings inside the firm to fund investment or return the profits to shareholders. Beyond the ‘distribute or retain’ decision, there are also different ways to distribute the profits (e.g. dividends or share repurchases). Ideally, firms would make these decisions with an eye to maximizing the return on investment and helping to grow the economy. However, since these different options are taxed in different ways, sometimes firms are pushed into making a different decision solely because of the tax consequences. The chart shows how corporate distributions are taxed using three methods, each taxed in different ways. The years shown are 2010 and 2016, using a British Columbia firm and top-tax-bracket investor as an example. The three ways to distribute income are:
- Traditional dividends come are paid after corporate tax is applied, and is taxed for individuals with a special income adjustment (the ‘gross-up’) and dividend tax credit.
- If the organization is an income trust, payments aren’t subject to corporate taxes but are taxed for individuals like interest income.
- If the firm uses the funds to repurchase shares, the value of the remaining outstanding shares are bid up, delivering value to shareholders through a capital gain.
In 2010, the taxation of these three methods was roughly in balance. In 2016 there is a 5.6 percentage point disjoint between dividends and capital gains, as a result of further federal corporate tax cuts and also increases to the high-income tax rate. In Ontario, this gap is now at 9.2 points.
Ten years ago, similar tax gaps metastasized into the income trust fiasco as firms reorganized into income trusts solely to game the taxation of distributions. Canada should nip the problem in the bud this time, either by making the dividend tax credit more generous or by increasing the capital gains inclusion rate.”
Living without the oil boom
Glen Hodgson, Conference Board of Canada
The accompanying chart shows that Canada has lost $56 billion in annual oil export revenues, or about a third of corporate profits. This negative price shock forms the context for the federal budget.