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Is Budget 2019 addressing key economic and financial challenges facing the Canadian economy?

by Mostafa Askari and Sahir Khan

Minister Morneau has tabled his fourth budget. We expected that it would be a budget that would enhance electoral prospects for the Government in October.  However, what we got is a plan that touches upon many issues and sectors but does not effectively deal with any of the key challenges facing the economy. 

The budget presents more than 120 new measures with a price tag of almost $23 billion targeting all demographics but with some emphasis on millennials and seniors.  But it does not provide a solid solution for any of the problems that the Budget itself identified. For example, the Budget is setting up a portable training benefit where individuals can accumulate benefits over time to use them for training or retraining in the future.  This type of program is offered in a number of European countries and a few U.S. States.  The results suggest that they have been effective in those jurisdictions, but the key is to allow individuals to accumulate sufficient amount of benefits that would allow for a meaningful skills training.  The Budget measure allows $250 a year, which is hardly sufficient to help individuals to learn new skills.

Before the Budget we identified four main challenges that we hoped the Budget would address.  First, in the face of growing global and domestic economic uncertainty, the Budget needed to reassure Canadians that the policy plan of the Government takes into account the economic headwinds.  This Budget does not address some of the key sources of domestic uncertainty such as the tariffs on steel and aluminum and the ratification of the United States-Mexico-Canada trade agreement.  These issues are affecting business and consumer confidence and need to be addressed if the Government wants to succeed in implementing its economic and fiscal plan.

Second, the Budget should have built confidence with a credible fiscal plan.  Instead the Budget’s fiscal outlook is based on a survey of private sector economic forecasts conducted in February before the release of the fourth quarter GDP numbers that showed the economy effectively stalled at the end of 2018. This means there is downside risk to the Budget economic outlook.  Moreover, although the outlook for nominal GDP, which is a broad measure of the tax base, is about $12 billion lower, on average, relative to the Fall Economic Statement, the outlook for tax revenues is slightly stronger than the Fall Economic Statement outlook.

The Government appears to be ready to increase spending as long as it can show slightly declining deficit and debt to GDP tracks.  For example, better-than-expected economic and fiscal developments since the Fall Economic Statement provided the Government with close to $6 billion of savings in 2018-19, which would have reduced the deficit in that year to just over $9 billion.  Instead the Government decided to use up all the savings by introducing new spending measures including new funds for municipal infrastructure and reconciliation with Indigenous Peoples.  As a result, the estimated deficit in 2018-19 is $14.9 billion in Budget 2019. 

While the projected deficit is modest and Government finances are on track to fiscal sustainability, maintaining a declining budget deficit would be challenging if the Government plans to meet its policy commitments in the areas of defense, environment, health and education.  More importantly, any major economic shock would divert the Government from its targeted fiscal track. The following graph shows that since 2014-15, program spending and revenues have grown at a similar pace.

Third, the Canadian economy suffers from low productivity.  There is nothing in this Budget that aims to address this issue in a fundamental way.  The Government appears to be satisfied with the measures it introduced in the Fall Economic Statement to address business competitiveness following the significant corporate tax reductions in the United States.  But Canadian businesses continue to be at a disadvantage relative to their U.S. counterparts and it is important that Canada considers a fundamental reform of its tax system.  It is also disappointing that the Budget did not provide any indication on how it is going to lead efforts to eliminate internal trade barriers.

Finally, Canada faces long-term policy challenges related to climate change, income inequality, health and reconciliation with indigenous Canadians.  The latter received a great deal of attention in the Budget. In fact, the Budget allocated $4.7 billion dollars for this policy challenge, which is larger than what any other policy area received.  There are also measures to address challenges for low income seniors, housing affordability, student debt, which are modest steps to address inequality.   However, despite the commitment to introduce a pharmacare plan the Budget did not provide any indication on how it plans to implement a pharmacare plan. More importantly, given the current fiscal framework it is not clear how the Government is going to fund a comprehensive pharmacare plan without showing substantial deterioration in the budget balance.   

So, what makes this a pre-election budget and not an election budget?  It comes down to how much dry powder the government has left to fund a major policy initiative such as pharmacare in their electoral platform.  A relatively low-cost version of the policy could cost about $6 billion per year, according to the Parliamentary Budget Office.  This is the version that would plug gaps in the various provincial plans.  There are a few sources of funds that could provide the fuel for an election platform that includes pharmacare: 1) funds set aside in the fiscal framework for the ambitious defense procurement plan could be reprofiled or never find their way to the department’s reference levels; 2) while the Budget pegged the 2018-19 deficit at $14.9 billion, the government had a surplus for the first nine months.  Could there be a positive fiscal surprise in the fourth quarter of the fiscal year? 2) the changes to the taxation on stock options was not quantified in the budget.  Might there be a modest fiscal dividend? 4) the Budget leveraged lapsing infrastructure funds and a revenue windfall to fund the cities to the tune of $2.2 billion.  Should the infrastructure lapses prove persistent, they may serve as a source of funds.

Overall, this budget is not a solid economic and fiscal plan that would address short and long-term challenges facing Canada.  It is a political plan to ensure that every group and demographic gets something six months before the next election.  Further, by launching new entitlement programs and using virtually all of the available fiscal space (relative to the constraints of the fiscal anchor) the government may have tied the hands of the opposition parties for the upcoming election. It remains to be seen what dry fiscal powder, if any, the government has left for their (and the opposition) electoral platform.