Trudeau's Finance Chief Has Little Room for New Budget Measures

(Bloomberg) -- Finance Minister Bill Morneau is being told there is little additional fiscal space for new measures as he meets private-sector economists Friday to discuss the state of the Canadian economy ahead of the Feb. 27 budget.

The finance department’s latest survey of economists shows projections for national income -- the best indicator for revenue -- that are almost exactly what they were in Morneau’s last fiscal update in October. Overall, they are anticipating growth to slow down to the historically sluggish levels the economy has averaged in the post-recession era, after an unexpected pick up in 2017.

That effectively gives Morneau no room to ramp up spending without running higher deficits or raising tax levels, and likely means any new initiatives will probably need to be financed by reallocating spending within the existing framework or possibly tapping into existing buffers built into the fiscal plan.

Speaking after announcing the date earlier this week, Morneau said the budget would “continue to ensure that middle class Canadians are doing well” and include investments in research, science and skills training for what he called the “economy of tomorrow.” 

Reducing Debt

Still, the Feb. 27 plan is likely only a placeholder for a more ambitious pre-election budget that should arrive at about this time next year. The constrained fiscal framework could pose a serious dilemma for Prime Minister Justin Trudeau’s government, which says it remains committed to at least reducing the nation’s debt as a share of gross domestic product.

“We want to continue to show Canadians that we can make those investments while reducing the amount of debt as a function of our economy,” Morneau told reporters Tuesday outside the legislature in Ottawa. “That will continue to be our anchor.”

Today’s steady economic picture contrasts with a fiscal update in October when the government reported an unexpected windfall in revenue due to a stronger-than-expected economy. It used it to scale back deficit projections and finance new spending.

In October, the Liberal government cut its deficit projection for the fiscal year that ends March 31 to C$19.9 billion ($15.9 billion), down from C$28.5 billion in the March budget. It also projected a cumulative deficit over the coming five fiscal years of C$86.5 billion, compared with C$120 billion previously.

While the department doesn’t typically release the results of its survey of private sector economists, Bloomberg gathered forecasts independently from Canada’s six biggest banks. Here are some of the results:

  • Economists are projecting nominal gross domestic product will average about C$2.23 trillion between 2017 and 2019, almost exactly the same forecast as in October.
  • Nominal GDP growth is forecast at 5.2 percent in 2017, 4.1 percent in 2018 and 3.6 percent in 2019. Growth has averaged 3.8 percent since 2010, well below the 7.4 percent average over the past five decades.
  • Unless the government changes its estimate for revenue as a share of nominal GDP -- which was 14.5 percent in October -- that means the revenue picture will probably be little changed through 2019.

The finance department holds as many as four economist surveys a year that in turn form the basis of its own forecasts.

©2018 Bloomberg L.P.