Economic analysis

The tough economic questions facing Trudeau

The big question from participants in Maclean's Town Hall: Can Trudeau's election promises still be met?

Petro-Canada's Edmonton Refinery and Distribution Centre glows at dusk in Edmonton. (Dan Riedlhuber/Reuters)

Petro-Canada’s Edmonton Refinery and Distribution Centre glows at dusk in Edmonton. (Dan Riedlhuber/Reuters)

Prime Minister Justin Trudeau’s Liberal government was elected, in part, because of a plan to reignite Canada’s economic growth through a combination of deficit spending and tax cuts for the middle class. Yet, two months after voters went to the polls, GDP growth forecasts have been trimmed, the price of oil has slumped further and the Bank of Canada is talking about negative interest rates.

In short, Trudeau’s task of priming Canada’s economic engine looks a lot tougher today than it did just a few months ago—and participants in Maclean’s town hall event were eager to know whether his election promises would need to be changed as a result. Here are three key questions asked during the town hall—on federal deficits, tax policy and the oil sector—and an analysis of the Prime Minister’s responses.

1. Budget deficits

During the election, the Liberals promised to run deficits of no more than $10 billion a year for three years before returning to balanced budgets before the next election. But recently Trudeau has stopped talking about the $10-billion figure almost entirely, explaining last week the previous government’s budget projections were “wildly optimistic” about the price of oil and how much related revenue would be flowing into federal coffers. As a result, it’s become clear that Ottawa will need to go into deficit just to fund existing programs and other promises, never mind the big boost in infrastructure spending that was at the core of the Liberals’ economic program.

When asked about the shifting deficit talk during the town hall, Trudeau said the Liberals had also promised to be transparent with Canadians about the country’s financial picture. He also noted that the Liberals’ campaign materials committed to a steady reduction in the federal debt-to-GDP ratio, now around 33 per cent, which is what the government is now focused on. By that measure, the Liberal government could conceivably go into the red by as much as $25 billion annually as long as Canada’s economy continues to grow. “The commitment we made was to create growth for the economy that, quite frankly, hadn’t had the growth it needs for a while,” Trudeau said.

Though the debt-to-GDP yardstick gives the government far more wiggle room than a $10-billion deficit cap, Jennifer Robson, an assistant professor of political management at Ottawa’s Carleton University, noted that international bond markets, which determine the price at which Ottawa can borrow, may not be as accommodating, given the creaking balance sheets of provinces like Ontario. “Politically, it’s true that provincial balance sheets aren’t the responsibility of the federal government,” Robson says. “But the international bond markets may not see things that way. At some point, the provincial fiscal balances also become a shared political problem.”

Trudeau was also asked whether he would consider raising the five per cent GST, which Stephen Harper’s Conservatives previously cut by two points, to help make up any federal budget shortfalls. The Prime Minister responded flatly: “No,” echoing a previous campaign pledge. Robson, however, says the moment could well prove to be a wasted opportunity. While tax increases are never popular, she argues, Trudeau is still enjoying a honeymoon with voters and that such a tax hike will only become more politically difficult as time goes on. Besides, she adds, “Canada’s balance on income versus consumption taxes needs a fresh look, especially if a policy goal of the new government is to promote environmentally sustainable growth.”

2. Tax cuts

Another key plank in the Liberals’ election platform was the promised tax cut for the middle class, which passed a vote in the House last week. The change—the 22 per cent rate for taxable earnings between $45,282 and $90,563 will be reduced to 20.5 per cent—is designed to give middle-income earners a break and was supposed to be paid for by a tax increase on the country’s wealthy. However, Finance Minister Bill Morneau has since conceded the federal treasury will actually face a $1.2-billion shortfall as a result of the change (mostly because wealthy people pay professionals to minimize how much tax they pay).

Budget considerations aside, one participant in the Maclean’s town hall wondered why the Liberal government didn’t offer Canadians making less than $45,000 a year similar relief? It’s a fair question, and one that Trudeau mostly dodged. At least one recent study by an economist at the Canadian Centre for Policy Alternatives suggested the savings for most middle-income families would have been larger, on average, had the government cut the lowest tax bracket to 14.5 per cent from 15 per cent. See a breakdown of his argument here.

3. Oil pipelines

Upon arriving in office, Prime Minister Trudeau was greeted with a widely expected decision by U.S. President Barack Obama to reject TransCanada’s Keystone XL pipeline, which would have carried oil sands crude from Alberta to Gulf Coast refineries and beyond. Given that beleaguered oil sands firms still suffer from insufficient pipeline capacity to get their oil to international markets, it’s no surprise Trudeau was asked about his government’s planned approach to TransCanada’s made-in-Canada solution: the proposed Energy East pipeline, connecting Alberta with the East Coast. But, if anything, his response only served to further muddy the waters by suggesting the decision was now up to Canadians, and their need to balance economic growth with environmental sustainability.

Trudeau’s new team has been figure-eighting for the last few weeks around what sort of pipeline approvals process lies ahead for Energy East and Kinder Morgan’s TransMountain pipeline expansion project in B.C., the projects already inside or at the mouth of the regulatory tubes. First there were the election pledges from Trudeau to improve the process, with more input from concerned regions and Indigenous groups. Then came signals from both Environment Minister Catherine McKenna and Natural Resources Minister Jim Carr that bitumen lines to the Atlantic and Pacific coasts would continue through the existing National Energy Board (NEB) approvals system. Third, there were quick clarifications that there will be some sort of “transition strategy” to align with the Liberals’ new approach.

In the wake of the Paris climate change agreement, which environmentalists claim would be seriously undermined by more oil sands pipelines, the Prime Minister now seems to be suggesting more of a popularity contest blended in with the Conservative-era technical assessments that cleared a path for the Harper cabinet to conditionally approve the controversial Northern Gateway pipeline to Kitimat, B.C. “The reality is that it’s for Canadians to decide,” Trudeau said, speaking in French. “It’s for government to create a clear process by which Canadians can decide if they’re confident, if they support this project.”

TransCanada says it’s ready to handle any additional environmental scrutiny the Liberals may apply to Energy East as the firm prepares a final application. “We will work with the new government in its efforts to ensure we have the best possible standards and process moving forward,” a company spokesperson said in an interview. Kinder Morgan’s lawyers will present final arguments for their $6.8-billion western expansion to the NEB in Calgary on Thursday. Meanwhile, minutes after Trudeau’s town hall, Calgary Mayor Naheed Nenshi said regulators should just “get on with it” and okay the two pipelines, suggesting there will be at least one ‘yes’ vote—a prominent one—in the decision process Trudeau may wish to create.
— With files from Jason Markusoff