As part of this week’s Maclean’s On The Hill politics podcast, Cormac MacSweeney spoke with federal finance minister Joe Oliver over the phone from Davos, where he was attending the World Economic Forum. They discussed the impact of plunging oil prices on the economy, fiscal responsibility in the face of a grim Bank of Canada outlook, and why a surplus is so important to the federal government. A transcript follows the audio below.
I know you don’t want to talk about the specific interest rate decision from the Bank of Canada but the bank has also given a very dire outlook for the economy—the governor of the bank saying the shock in in oil prices should lead to investments being scaled back, a rise in unemployment, and a reduction in consumer spending in the next year at least. In your eyes, how bad is the economy right now?
Well, the economy is in pretty good shape. What we’ve had is an externally induced shock which has implications both positive and negative. The World Economic forum just downgraded Canada’s economic prospects for next year but only by one tenth of one percent. We see the implications benefitting some sectors, hurting others, and having, broadly speaking in the intermediate term, a neutral impact on the real economy.
But the governor has addressed that as well, saying yes there will be benefits and negative effects, but the negative effects are the ones that are going to outweigh.
Well look, yes he has certainly outlined those issues, and we’re very much aware of that, I just want to put the whole issue in perspective. We’re still looking forward to growth which will be better than most G7 countries, we still are in a very solid fiscal situation with our debt-to-GDP, half that of the G7, and we’re looking forward to a budgetary balance next year. So while these negatives are real, they have to be put in perspective in the broader performance of the Canadian market.
But even our GDP, the growth that you spoke of, has been downgraded as well, not just by the Bank of Canada, but by some of the private sector groups you look to for advice while putting together your budget. As Governor Poloz put it, it’s not a stalled economy, but it’s a significant slowdown to that growth.
Well it is a slowdown, but it’s not a huge slowdown as a percentage. As I said, the World Economic Forum marked it down by a tenth of a point and we have somewhat different views. We will hear from the 50 private-sector economists prior to the budget. We will base our estimates on their projections, and as we do, we’ll come up with an approach that takes into account, in an objective way, what people believe will be the growth, and then translate that down into the fiscal framework, that is to say how it impacts our bottom line.
So let’s talk about those private-sector forecasts, because TD Economics has crunched its numbers, and they forecasted that if everything sort of stayed the way in terms of spending now, there’d be a $2.6-billion deficit. The Conference Board of Canada saying $4.3 billion will be lost in the federal government just on oil revenues alone. They’re also talking about how it’s economically acceptable to have a small federal deficit this time around—you don’t need to hit that surplus right away. Is that something you’re looking at at all, when you’re trying to figure out this budget, especially when private-sector economists are saying it’s okay?
I would say—no, we’re not looking at that. The first point I’d make is what they’re saying is we’re in pretty good shape because they think a deficit wouldn’t be that harmful. But we agree we’re in pretty good shape, but we feel it’s important to have a budgetary surplus. We promised Canadians in the depths of the recession when we had to stimulate the economy to create jobs to create economic activity that we would get back to economic balance when we could. And we’ve taken a lot of measures to get there. But those measures have no included cutting transfers to the province and they’ve continued to go up and they will continue to go up, for social programs and health care and equalization. We’ve announced the biggest and longest infrastructure program in the history of Canada, and we’ve introduced significant tax benefits for families with children—all 4 million of them. We’ve managed to do all that even though our flexibility has been reduced, and have a budgetary balance and we intend to get there, and we think that’s the right thing to do.
But how can you balance the books when there are so many dire warnings about growth slowing, about Target closing down shop, there are other companies that are announcing they’re shuttering down shops as well, 17,000 people out of work out of Target’s announcement alone, and that’s going to be a big impact on the economy. Why is it so necessary to get us back into surplus now when you could spend more and be in deficit and help spark the economy a bit to get it out of this rut?
We’re spending a lot on infrastructure and we’re providing a lot to provinces and individuals and we’re stimulating the economy through low taxes. But just to address the point about avoiding the deficit: we think it’s important to avoid transferring the debt to our children and our grandchildren, that intergenerational transfer is unfair, we think it sends a negative signal to investors and the Canadian public if we reduce confidence in the Canadian economy. We think it’s important to have interest rates come down—I mean the interest obligations come down so that the money can be used for social programs. It’s very important that our country has the fiscal strength to withstand shocks, of which the oil decline is one and because we’re in good fiscal shape, we’re able to withstand that and to deal with the longer term challenges such as an aging population.
Minister, I’m going to try to get an idea of how exactly you’re going to balance the budget, because you haven’t really explained that yet about how you’re going to do it when we have so much lost revenue. I’m going to do some rapid-fire questions: will we see any stimulus spending to try and boost the economy during this downturn?
That’s something we’ll be discussing in a budget whether or not we have the flexibility to do that.
Will we see any increase or impact on taxes?
We will not be increasing taxes, that I can tell you.
Will you be dipping into the contingency funds—you have about 3 billion each year that you have as contingency funds—to try to balance the books given everything that’s going on?
I can’t answer that today, but I can say the contingency fund is there for unexpected and unavoidable events.
Would this be an unexpected and unavoidable event?
Well, it is unexpected and unavoidable, but whether we need to dip into it is something we’ll disclose in the budget.
Okay, so you’re not going to increase taxes, we’re hearing that revenue is dropping significantly, you’re not really talking about whether you have room for stimulus spending or not, and you’re not saying whether you’re going to dip into the contingency fund, so what has to give to balance the books? Should we expect to see cuts to departments, and cuts to spending overall to try to make sure you balance the books? Is that what has to give?
Well look—I’m just not in a position to get into these details now, because the whole point of having the budget no earlier than April is to see some stability in a rather unstable commodity price in the market and in the end we’ll be in a much better position to know where we can go, what we’re getting, in our forecasts, and our independent economists will take the average and we’ll make decisions accordingly.
I asked you last year about income splitting and the family benefit measures that you announced then that would take $4.6 billion out of your surplus, or the projected surplus at the time, and I asked whether that was responsible fiscal planning to allocate money that you didn’t have yet, that could be in flux. You stood by it at the time, now we’re seeing that flux, the oil prices and the shock we’re seeing from this. Do you think this was still fiscally responsible to have spent that money before you even posted a surplus, because you weren’t even supposed to make the announcement until after the books were balanced?
Well, we think it was the responsible thing to do. After all, surpluses are not there to look at, they’re there to provide benefits to Canadians. We have the flexibility to honour that commitment and we will and we’ll be able to do that without going into a deficit.
The issue is you’re saying that surpluses aren’t there to look at, but we don’t even know what the surplus is yet, and you spent that already.
Well, what we have most certainly is an idea—we’ve made our preliminary calculations and we’ll be finalizing those, but we’re comfortable that we will have a budgetary balance, and we will be honouring our commitments to Canadian families.