I posted here on November 2 that Finance Minister Bill Morneau would very likely use his Fall Economic Statement to announce the Trudeau government planned to continue the deficit financing path it adopted from the first day of its mandate. After all, Trudeau himself is reported to have said that it was his pledge to run deficits in order to stimulate the economy, initially viewed as a foolhardy gamble, that won him the election in 2015.
Today Morneau delivered the fiscal update and it turns out that (ahem) I was right. The government is planning on about C$ 17.5 billion in new spending over the next five years. To be more precise, it's planning to forego revenues of about $ 16.5 billion as it attempts to assist Canadian businesses to compete with the massive tax cuts instituted by the Trump administration: tax expenditures, rather than spending per se, although the bottom line impact is, of course, the same.
Morneau argued in his speech that Canada could not afford to match the US tax cut directly because to do so would cost billions in lost revenues. How does that differ from what is being announced today? The problem with the straight corporate tax cut instituted in the US is that there's no guarantee that corporations will actually invest the windfall. US corporations have shown over the past decade that they are quite willing to sit on mountains of cash, and there's no guarantee that the Trump windfall won't just be added to the pile.
Morneau's approach involves capital cost allowances and write-offs, with a particular focus on clean energy investments. Companies will only benefit from tax reductions if they undertake qualifying investments, which the government hopes will drive long-term growth and higher productivity.
As for the bottom line, the proposed measures will increase the deficit this year and in each year of the five-year planning horizon. A shortfall of $19 billion is now seen for the upcoming year, tapering to $12 billion in 2023. This will result in a very gradual decline in the debt/GDP ratio, but Morneau was careful to point out that on that measure, Canada's fiscal position is already the best among developed economies.
Recall that before the 2015 election, Trudeau's specific promise was to run deficits of $10 billion, but return the budget to balance by 2019. Today's update has no timetable for a return to balance. Canadians voted for the relatively cautious deficit plan in the last election, but what is being proposed now is quite different and may start to stir memories of the deficit spiral of the 1980s and early 1990s.
That's certainly how the opposition Tories will try to spin it, perhaps hoping that voters have forgotten that many of the biggest deficits in that era were run up by Tory governments, and that it took a Liberal government to straighten things out. On one reading, Doug Ford's victory in the Ontario provincial election, when he trounced a tax-and-spend Liberal election platform, might suggest that the Trudeaucrats won't be as lucky come next October as they were in 2015.
It seems, however, that the federal Liberals are judging that Ontario's vote was a "get rid of Kathleen Wynne at all costs" tidal wave that won't be repeated across the country. There are enough signs of buyers' remorse in Ontario -- Doug Ford's popularity has fallen sharply -- to suggest that might be the case. Today's fiscal update can be seen as the starting gun for next year's election; it seems very clear that Canadians will be offered a very stark choice, at least in terms of economic policy.
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