Justin Trudeau became Prime Minister of Canada in October 2015 partly on a promise to run small fiscal deficits for just a few years in order to boost the economy. There was always supposed to be a plan to move the budget back into balance, and in the meantime the debt/GDP ratio would serve as a backstop fiscal anchor to keep deficits and debt from getting out of hand. It became clear quite quickly that the deficits would be bigger and more persistent than Trudeau had intimated -- and then came the COVID crisis, to which the government quite correctly responded by hugely boosting spending and the deficit.
As the threat from COVID eased, the budget deficit began to fall quite rapidly, but in the last couple of years Trudeau and his Finance Minister Chrystia Freeland have made it clear that they have no intention of reining in the government's finances. The 2024 Federal budget, unveiled by Freeland on Wednesday, indicates that all of the fiscal checks and balances promised back in 2015 have been abandoned.
You can read a summary of the government's proposals here. As promised in Trudeau's pre-budget cross-Canada tour, there is heavy emphasis on measures to boost housing availability and affordability -- in effect, attempting to solve problems that have in large measure been created by the government's own out of control immigration policies. There are a few revenue-raising measures, of which the most significant is a boost in capital gains taxes. This is supposed to raise something like C$ 20 billion, even though it is targeted only at the wealthiest 0.13 percent (really!) of taxpayers.
The end result of this is a string of deficits stretching out over the usual five-year planning horizon. The deficit for the just completed fiscal year 2023/24 was C$ 40.0 billion. It is projected to be remarkably sticky this year and next, at C$ 39.8 billion in FY 2024/25 and C$ 38.9 billion in FY 2025/26. After that, the deficit magically starts to fall much faster, but even by the end of the planning period, FY 2028/29, it is still projected to be C$ 20.0 billion. Every single one of these numbers is higher than was projected in the Fall Economic Statement back in November. And the fact that the deficits seem to fall faster in the "out years" is of course completely bogus, with an election due by October 2025 at the latest. We seem to be back to the kind of budgetary forecasting that got Canada into a fiscal mess under Tory governments back in the 1990s.
There is nothing wrong with deficit financing in principle. The idea that deficits always cause inflation is wrong; so is the idea that government financing needs "crowd out" private sector borrowers. And anyone who followed the ill-fated austerity approach followed by the UK government after the global financial crisis surely knows that you can never correct a budget deficit by squeezing the economy. The only true constraint on the economy is the availability of real resources, be they labour, capital goods or raw materials. As Keynes famously put it, "anything we can do, we can afford".
That's precisely the issue here. The Bank of Canada has had to keep interest rates uncomfortably high for a long time because the economy has been running very close to full capacity, or full resource utilization if you prefer. Bank Governor Tiff Macklem has subtly suggested more than once that high government spending has made the task of reducing inflation much harder than it needed to be.
It's arguable that the recent uptick in the unemployment rate has eased some of those concerns, something the Bank has acknowledged in its policy pronouncements. However, it is not clear that the pool of available workers, which largely consists of new arrivals and job-seeking college graduates, matches the current needs of the economy. To take just one example, the budget's commitment to build over 3 million homes by 2031 is going to require an awful lot of skilled construction workers. It is not at all clear where those people will be found.
Announcing its most recent monetary policy decision, the Bank of Canada projected that the economy would start to move out of its recent mini-slump after mid-year. As a result, the small amount of excess supply that has emerged over the past several months will quickly be eliminated, which would serve to put a floor under just how low the Bank can lower interest rates without reviving inflationary pressures. This Federal budget, which has been roundly condemned by such worthies as former Finance Minister Bill Morneau and former Bank of Canada Governor David Dodge, looks certain to continue to make the Bank's job more difficult in the coming years.
What a choice Canadians face when the election finally rolls around. The abrasive Tory leader Pierre Poilievre and his seriously inexperienced team, or the experienced but reckless Trudeau/Freeland combo. Polls say the election is Poilievre's to lose, and there does not seem to be much in the budget to change that.
No comments:
Post a Comment