Looming Election Sharpens Focus on Trudeau’s Spending in Budget

(Bloomberg) -- Canada’s next budget will look very familiar, with Justin Trudeau set to spend much of a revenue windfall and continued red ink in his government’s books.

Finance Minister Bill Morneau will unveil his fourth fiscal plan Tuesday amid an economic slowdown and a dip in the polls for Trudeau’s team amid allegations of judicial interference. The Liberal government has seen higher-than-expected revenues and has hinted there will be new measures on skills training, housing, pharmaceutical coverage and support for seniors.

None of it will sharply change the course of a government whose previous budgets have put windfalls toward social programs and transfers, while running deficits that steadily decline as a share of the economy. While Morneau has telegraphed the same will be true this year, the October vote that will decide if Trudeau gets a second mandate sharpens the focus on new spending.

“This is an election budget, it’s safe to say,” Goldy Hyder, president of the Business Council of Canada, said in an interview. The lobby group, which represents chief executives at the country’s top firms, has issued a warning about about fading competitiveness, but Hyder’s expectations are low for any major measures there or on trimming the deficit. “We should have been saving, and paying down debt and deficit, during the good times,” Hyder said.

The budget arrives amid a cloudy outlook for the nation’s economy. An oil shock last year stunted economic growth, with Bank of Canada Governor Stephen Poloz seen to be in a holding pattern on any new interest-rate hikes. Before Tuesday’s budget, Morneau’s most recent forecasts projected a deficit of C$18.1 billion ($13.6 billion) in the fiscal year that ends this month, followed by five years of declining deficits totaling C$76.8 billion.

The government has room to spend, however, without adding new taxes or ballooning the deficit. Revenue is coming in much stronger than expected, amid a red-hot labor market. Morneau has downplayed the significance of the numbers, but it nonetheless gives him some breathing room.

Despite that windfall, there’s more red ink than Trudeau pledged to voters the first time around. The prime minister won power in 2015 on a platform that forecast a return to balance by now. The opposition Conservative Party regularly attacks him over the scale of his deficits, though they remain modest by global standards at 0.8 percent of gross domestic product.

“We expect the government will spend part of this windfall while protecting the bottom line,” Scotiabank economists Jean-Francois Perrault and Rebekah Young wrote in a note to clients. They projected the deficit for the fiscal year that ends this month could plunge by C$10 billion, to C$7.7 billion, and fall to C$12.2 billion in the next fiscal year, before major new spending kicks in.

Skills Training

Of the four key themes Morneau has been talking up so far, funding for skills training in particular will be welcomed by the private sector. The Canadian Broadcasting Corp. reported the government will unveil a kind of lifelong learning account for Canadian adults, modeled after a similar program in Singapore. Hyder supports the idea and expects the budget will highlight “skills and the importance of preparing for the workforce of the future while you’re currently in it.”

That could include a move to make permanent a visa fast-track program for highly-skilled workers, which cut processing time to two weeks from months-long waits previously, another business group said. “We’re very optimistic that that program will be made permanent in this year’s budget,” said Benjamin Bergen, executive director of the Council of Canadian Innovators, representing tech firms. The program has been “very beneficial in order to bring over that one or two key individuals to build teams around.”

On housing, Morneau has stressed the need to maintain market stability while also making sure “millennials can see some optimism for them and their families,” suggesting some kind of support for first-time buyers. That would come after the government tightened mortgage eligibility rules in an effort to cool off the housing market, amid fears of bubbles in cities like Toronto and Vancouver.

“We’ve dealt with the risks in our housing market by looking at how we can ensure that it’s stable,” Morneau told reporters last month in Ottawa. “What we want to do is ensure that people have a sense of the possibility for them and their families.”

The budget will also likely offer a glimpse at the government’s infrastructure spending, which has seen funding delayed and pushed well into the future. Once a key plank of Trudeau’s fiscal plan, infrastructure spending is now a source of criticism for Trudeau, with the government accused of being slow in getting money out the door.

Morneau has also said the government will “make sure that seniors feel a sense of optimism” and that it will respond to a recent interim report on an expanded “pharmacare” program. Morneau has downplayed expectations in his party’s center-left coalition for a full national prescription drug program, saying instead he’s looking to address the high cost of certain medicines in Canada’s patchwork system and ensure coverage for all Canadians that need it.

--With assistance from Erik Hertzberg.

To contact the reporter on this story: Josh Wingrove in Ottawa at jwingrove4@bloomberg.net

To contact the editors responsible for this story: Theophilos Argitis at targitis@bloomberg.net, Stephen Wicary, Chris Fournier

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