Federal budget 2016: Building the case for cash

The Liberals justify deficits by stressing long-term aims, rather than short-term stimulus

Liberal leader Justin Trudeau operates a crane while touring a crane operator training facility Thursday, August 27, 2015 in Oakville, Ont. (Paul Chiasson/CP)

Justin Trudeau operates a crane while touring a crane operator training facility on August 27, 2015 in Oakville, Ont. (Paul Chiasson/CP)

Many Canadian political junkies think they know the moment most worth remembering from Canada 2020’s policy conference in Ottawa back in 2014. It was at the Liberal-linked think tank’s confab that fall that Justin Trudeau made news by dismissing Canada’s contribution of fighter jets to the combat mission in Iraq as a case of Conservatives “trying to whip out our CF-18s and show how big they are.” But only in the wonkiest of policy-wonk circles does anyone remember how, later that same day from the same stage, David Dodge made the case for governments fearlessly plunging into debt to pay for public infrastructure.

Yet it’s the former Bank of Canada governor’s dry remarks, not the future prime minister’s highly quotable crack, that echo now. As Trudeau’s government prepares to table its first budget on March 22, Dodge’s case for borrowing to build stuff has long since taken on the status of conventional wisdom. After all, his distinctive rasp is as close to the voice of God as exists in Canadian public policy debates. Along with once running the central bank, he was a key Finance Department official behind the last Liberal government’s celebrated elimination of deficits back in the 1990s.

So Dodge, who these days advises clients of the law firm Bennett Jones, made spilling red ink to fund public works sound to Liberals not just respectable, but shrewdly strategic. Rock-bottom interest rates, he said, make this “a very opportune time” for governments to borrow, particularly to pay for assets like new highways and faster telecommunications networks, which promise “a durable improvement in the standard of living.” Leap ahead to the 2015 election, and Trudeau followed that advice with his surprise promise—arguably the single most successful part of his platform—to run big deficits mainly to fund infrastructure.

That pledge remains central to Liberal planning as Finance Minister Bill Morneau puts the finishing touches on his first fiscal blueprint. Exactly how the infrastructure splurge will be greeted next week, however, is a subject of deep concern among Liberal advisers. They worry the multi-billion-dollar program will be seen as merely a reprise of former prime minister Stephen Harper’s 2009 response to recession—a quick, politically expedient and costly injection of stimulus. The Liberals contend that their version will be the start of a far more momentous project: a long-term retooling of the Canadian economy for sustained growth that will deliver rising middle-class incomes.

Their preferred framing continues the marketing of the Liberal government as ambitious and forward-thinking. Taking the focus off what’s ailing the Canadian economy right now also has the advantage of easing pressure on Morneau to somehow deliver a short-term cure. It’s not at all clear what that prescription would be. In a way, Harper’s challenge in early 2009 was far more straightforward. That winter, the recession brought on by the U.S. financial market collapse was hitting Canada hard. The Conference Board of Canada’s 2009 winter forecast had the economies of Canada’s four biggest provinces—Ontario, Quebec, Alberta and British Columbia—all shrinking. Big spending seemed obvious.

The board’s 2016 winter forecast presents a more complicated outlook. It sees only Alberta’s economy shrinking this year. Even Saskatchewan and Newfoundand and Labrador, the two other provinces slammed directly by the oil price plunge, are projected to grow a bit. Marie-Christine Bernard, the economist in charge of the board’s provincial forecasts, points to Ontario’s expected gross domestic product growth of 2.4 per cent for 2016 as “a good result,” and B.C.’s country-leading 2.7 per cent as “solid growth.” In Manitoba, Bernard notes, hydro development is keeping the economy expanding, while Nova Scotia benefits from new shipbuilding projects.

Beyond those significant province-by-province differences, there’s been a subtle relaxing, in recent weeks, of the wider sense of urgency about Canada’s economy. In early January, Bank of Canada governor Stephen Poloz painted a grim picture, predicting it might take three to five years for Canada to recover from the oil price shock, an adjustment he warned would be “difficult and painful for individuals.” By early this month, though, Poloz decided to leave interest rates unchanged, and the central bank said financial market volatility “appears to be abating.” Also in the first week of March, Statistics Canada reported a stronger-than-expected bounce in exports for January, as Canadian firms finally seemed to be taking advantage of the low loonie to boost sales into a fairly healthy U.S. market.

Still, private sector forecasters are not declaring an end to anxiety. CIBC senior economist Royce Mendes says Morneau will deliver his rookie budget into an economy hungry for government spending. “Yes, we’ve seen some better data. Yes, the Bank of Canada seemed to suggest the risks are kind of balanced,” Mendes says. “Yes, there have been some upside surprises recently, but they were set against very low expectations.” He says the 2016 outlook remains “weak to modest.”

That’s assuming sizable stimulus from Ottawa, spending built into the CIBC’s projections. Back in the fall election campaign, the Liberals promised to hold annual deficits to no more than $10 billion. They abandoned that ceiling as the economy stayed sluggish. Last month, Morneau said the government was on track to post an $18.4-billion deficit in 2016-17, but that didn’t include any of the fresh spending he’ll announce on budget day. Mendes expects a $35-billion federal deficit for the coming year, and doesn’t regard that as remotely troubling. He points to Canada’s low level of government debt by international standards. “We’re starting from a very favourable point compared to countries like the U.S., Japan,” he says, “and they have no trouble coming to debt markets and still borrowing.”

Still, polls show many Canadians remain uneasy about deficits, and the Liberals will have to justify much bigger ones than they proposed in the campaign, even though most of the country isn’t in recession. So they are stressing long-term goals like more social housing, green infrastructure like public transit, and clean energy. But where will money flow first and fastest? Mendes says the basic choices are creating jobs where the oil sector has shed them, especially Alberta and Saskatchewan, and investing where export-driven growth potential is most promising, notably Ontario and Quebec. Leaning decisively either way would invite a political firestorm around regional favouritism. “You may see it evenly distributed,” says Mendes.

While Morneau will want credit for the infrastructure plan, he’ll also try not to let it hog the budget spotlight. The Liberals’ promised new Canada Child Benefit (CCB) could vie for top billing. The CCB will replace a raft of existing payments to parents, including the Tories’ signature monthly Universal Child Care Benefit and the income-tested Canada Child Tax Benefit. In his election platform, Trudeau promised nine out of 10 families will get more than they do now under the streamlined, tax-free CCB—an average of $2,500 extra a year from Ottawa for the typical family of four. That’s enough to pretty much guarantee a positive reception from voices on the left, like the Canadian Centre for Policy Alternatives, which says the CCB will “drive down poverty among children and their parents.”

In fact, the CCB might well end up looking more impressively thought-out as social policy reform than anything about the infrastructure spending will as economic policy. Morneau has already signalled that the Liberal plan needs more work. He only recently named Dominic Barton, global managing director of the consulting firm McKinsey & Co., to head a new advisory council on economic growth. If Dodge helped create the climate for the Trudeau government’s first budget, Barton has a chance to be the deep thinker who influences their next one.