Canadian budget preview

Finance Minister Bill Morneau will table the 2018 Canadian Federal Budget this coming Tuesday.  With the economy looking reasonably strong in terms of growth and employment, no significant change of course is likely.  However, Morneau and his staff will have to strike a careful balance in the face of a number of looming uncertainties.

Many of these uncertainties relate to developments south of the border.  The steep tax cuts that were finally passed by Congress raise real issues about Canada's tax competitiveness.  The US business tax rate, once significantly higher than the equivalent Canadian rate, is now much lower.  Morneau has said that he will not be rushed into matching the US move, claiming that there are factors other than tax rates that determine where businesses locate and invest.  Maybe so, but the Government will have to be alert to any signs that Canada is starting to lose out because of the lower tax regime in the US.

Then, of course, there's NAFTA.  The signals emerging from all three national capitals are so mixed that it would be foolhardy to attempt to predict the final outcome.  The Trudeau government claims it has "Plan B and Plan C and Plan D" all ready in case NAFTA falls apart.  It would be prudent for Morneau not to use up all of his fiscal firepower this week, in case those plans have to be put into effect. 

The next federal election is not until Fall 2019, so Morneau will introduce at least one more budget before campaigning begins in earnest.  However, it's worth recalling that when Justin Trudeau first proposed a return to deficit financing, he pledged to get the budget back into balance by 2019.  That promise was quickly abandoned, but if the Government makes no commitment at all to start moving back toward balance, however slowly, it is beyond doubt that the opposition Tories will be quick to call Morneau out for fiscal irresponsibility.

A further consideration, in terms of how stimulative fiscal policy should now be, is the interaction between fiscal and monetary policy.  January CPI data showed that the Bank of Canada's obscure core measures of inflation, which have been slowly rising since mid-2017, are close to moving above the 2 percent target. Further rate hikes are already inevitable, and excessive fiscal stimulus at a time when the economy is already close to full capacity would seem certain to force the Bank to move further and faster than it otherwise would.

There have been surprisingly few leaks ahead of this budget, which may mean it will be a non-event.  Supposedly there will be measures aimed at correcting gender inequality; there may be some minor help for beleaguered local newspapers; and no doubt there will be talk about closing tax loopholes.  Over to you, Mr Morneau.