It’s not easy running a minority government. The task becomes even more complex with a slowing economy, a prolonged period of mediocre economic growth and heightening global risk hampering the chances of a brand new wave of job-creating prosperity—even if unemployment remains very low by historical standards.
That reality became obvious when Finance Minister Bill Morneau delivered the 2019 Economic and Fiscal Update this week. In it, he explained what is already widely known about the current state of the global economy:
After peaking in early 2018, global economic activity has moderated significantly, with growth restrained by several factors, including fading fiscal stimulus in the United States, rising international trade tensions and ongoing geopolitical uncertainty. These elements, together with concerns about softer longer-term growth prospects, are weighing on industrial production and commodity prices, and putting downward pressure on long-term interest rates.
Translation: Due to circumstances beyond the treasury’s control—combined with relatively high government spending—Ottawa is sliding deeper into the red. Furthermore, deficits will continue to climb thanks, at least in part, to low interest rates that are delivering weak investment returns and causing havoc for government bean counters looking to account for public sector pension obligations.
The update’s less-than-optimal news was that the 2019-20 deficit projection has climbed to $26.6 billion from the $19.8 billion forecast in the 2019 federal budget. Next year’s deficit forecast has also grown significantly, to $28.1 billion from the $19.7 billion predicted in the budget. This comes at a time when provinces such as Alberta and Saskatchewan are demanding a greater slice of the federal revenue pie to help cushion the blow of declining oil and gas prices. In other words, we can expect deficits to be a long-term feature on the federal economic landscape, even if Morneau predicts a drop to an improved, yet still sizeable, $11.6 billion shortfall by 2024–25.
To improve fiscal reporting and reduce the shock of fiscal re-evaluations that can make previous projections look wholly inaccurate, the government also announced plans to:
… consult on a potential new financial measurement concept—the operating balance— and how it might be used in its financial reporting framework. The operating balance could isolate the volatility often seen from actuarial gains and losses on pension and other future benefit obligations by showing actuarial gains or losses as a separate line item—rather than as part of overall program expenses.
To appeal to the so-called Middle Class taxpayer—which, surveys have shown, includes about 90 per cent of Canadians who self-identify in this socioeconomic group—the government highlighted its previously announced increase to the Basic Personal Amount. The tax credit on basic personal income will gradually increase before topping out at $15,000 by 2023. The Liberals pit the potential tax savings for Canadians at $3 billion in 2020 alone. The exempt amount is gradually reduced for those with net income in excess of $150,473 and will be completely phased out for those earning more than $214,368.
While higher-earning entrepreneurs will be only marginally impacted by the BPA change, the economic update failed to address the business community’s ongoing list of concerns, namely regulatory red tape, the burden of managing increasing Canada Pension Plan and Employment Insurance rates, tax complexity and legislative compliance challenges. But in a minority environment with a government reliant on left-leaning parties to remain in power, it’s unlikely the Trudeau Liberals will rush to provide relief to business owners in these areas.
The key takeaway from the Fall Economic Update is Ottawa’s relative lack of flexibility when it comes to responding to potential economic shocks, or even a mild downturn, with fiscal stimulus. With deficits already running at high levels in an extended period of economic expansion, the government simply lacks the room to address a contraction without spiking deficits to very uncomfortable levels.
As Rebekah Young, Scotiabank’s director of fiscal and provincial economics, commented:
“In past Canadian recessions, deficit spending has typically increased between 3 to 6 per cent of GDP (peak-to-trough) above and beyond its starting fiscal position … We have estimated Canada would need to run a deficit peaking at around 4 per cent of GDP (or about $75-billion annualized over six quarters) to respond to a recession today.”
Those are numbers that Canada’s business community should find disconcerting. It means that when an economic downturn does eventually arrive, Ottawa will have a difficult time riding to the rescue of struggling businesses without compromising our country’s financial standing. And that’s before the government is potentially pressed by its parliamentary allies into making sweeping new social spending commitments—such as a national pharmacare program—simply to stay afloat.
Indeed, the Trudeau Liberals are learning that fiscal management becomes far more complex when growth slows and the Official Opposition is ready to pounce at every turn.
Marshall Egelnick, Managing Partner