Trudeau Spends Budget Windfall Under Cloud of SNC-Lavalin Crisis

(Bloomberg) -- Justin Trudeau unveiled a pre-election budget littered with as much new spending for key voter groups as he could deliver without sacrificing the government’s fiscal credibility.

Trudeau’s finance minister, Bill Morneau, detailed his fourth fiscal plan Tuesday in Ottawa, the government’s last before an October election. It pledged C$22.8 billion ($17.1 billion) over six years for a wide-ranging set of measures that include new funding for young home buyers, seniors, infrastructure and indigenous communities, and loan relief for students.

The plan continues the hallmark of Trudeau’s fiscal policy since taking power in 2015 -- a preference for new spending over returning the budget to balance, while trying to keep deficits low enough to reassure Canadians he remains fiscally prudent. He stuck to that playbook this year, using a windfall in revenue to dish out spending without derailing the government’s plan to gradually reduce deficits over time.

Trudeau is hoping a good-news budget will help reverse a slump in the polls for his Liberal Party, which is in the middle of its worst political crisis. Trudeau and others were accused by a former attorney general of trying to end a criminal prosecution against Montreal-based construction giant SNC-Lavalin Group Inc.

The budget “is an attempt to remind Canadians that this government is defined by more than the SNC-Lavalin affair,” National Bank Financial Managing Director Warren Lovely said in a research note. “There are a variety of pre-election goodies here.”

Read more: Key Takeaways From Trudeau’s Pre-Election Budget

The Liberals have lost their polling lead since the SNC scandal erupted. They’re now backed by 32.7 percent of voters, trailing the Conservatives at 35.3 percent, according to a polling aggregator run by the Canadian Broadcasting Corp.

Unlike other parties, the road to power for the centrist Liberals includes winning over both left-leaning voters who favor social spending and fiscal conservatives who want to see smaller deficits. In his budget speech, Morneau sought to give a nod to both constituencies.

“We’re going to work hard to build an economy that works for everyone, where every person has a real and fair chance at success,” Morneau said, after introducing a budget that’s unlikely to change the Bank of Canada’s interest-rate path. “And we’re going to make these investments to grow our economy for the long term while we bring the books back towards balance.”

Trudeau had once pledged to balance the budget by now, only to widely miss that mark. Instead, to keep the fiscal conservatives on board, they’re planning to lower the ratio of the federal government debt to gross domestic product every year and shrink the size of deficits. Tuesday’s budget does that, but barely.

While the 2018 deficit numbers came in at a below projected C$14.9 billion, new spending will drive shortfalls back up to near C$20 billion over the next two years before they begin to fall again. The debt-to-GDP ratio will inch lower, from 30.8 percent in 2018 to 30.7 percent in 2019. It will be a tough anchor to keep if the economy deteriorates, and provides scant room for any new spending ahead of the election.

Deficits matter in Canada, with a collective aversion to debt that was cemented in the mid-1990s amid rating downgrades, a falling currency and a national unity crisis. In the 2015 election campaign, Trudeau pledged to run deficits but for only three years and no more than a cumulative C$25 billion. It remains an explosive issue, even though the deficit is less than 1 percent of GDP, far below many other western nations. The U.S. budget deficit in 2019 is roughly 5 percent of GDP.

Business ‘Disappointment’

Business groups lamented that the budget does nothing to ease rising competitiveness concerns. “When you look at some of the major problems facing the Canadian economy, there’s a lack of business investment right now,” Matthew Stewart, director of economics at the Conference Board of Canada, said in an interview. “There’s going to be a bit of disappointment in the business community.”

Trudeau has come under plenty of scrutiny for not being careful enough with spending, with Tuesday’s plan likely to provide plenty of fodder for critics. The higher deficit this year is the outcome of plenty of spending for potential voters -- with seniors, students and young families the big winners.

“The budget is a grab bag of voter-friendly measures,” Royal Bank economists Craig Wright and Josh Nye wrote in a research note. “It was hard to spot a centerpiece among these initiatives.”

A new initiative to lower interest rates on student loans will also cost the government C$1.7 billion over five years. Another high-cost item, worth C$1.8 billion over five years, will be to enhance guaranteed income payments to old-age pensioners. There are also new incentives to buy electric cars, costing more than half a billion over five years.

Skills and Housing

Additional spending is being allocated for training, both through a new credit program and through the Employment Insurance system, partly financed by higher premiums for companies. Morneau is also providing an immediate lump-sum payment of C$3.2 billion for municipal infrastructure and energy efficiency programs. The budget also includes funding for farmers, who have seen slivers of their protected sector bartered away in trade talks.

One marquee item in Tuesday’s budget was a notable change to housing policy catering to youth, a crucial demographic in Trudeau’s last election win. The program will allow the country’s housing agency to help first-time buyers by taking up to a 10 percent stake in a home, lowering the size of their mortgage. The government is also increasing the amount of money first-time buyers can withdraw from their retirement savings for a down payment, and expands the situations in which they’re allowed to do so.

--With assistance from Erik Hertzberg.

To contact the reporters on this story: Josh Wingrove in Ottawa at jwingrove4@bloomberg.net;Theophilos Argitis in Ottawa at targitis@bloomberg.net

To contact the editors responsible for this story: David Scanlan at dscanlan@bloomberg.net, Stephen Wicary, Chris Fournier

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