Evaluating Harper, Trudeau fiscal outlooks not easy

Canada Politics

[Justin Trudeau and Stephen Harper ® on Oct. 22, 2015 in Ottawa. REUTERS/Chris Wattie REUTERS/Chris Wattie]                   

Justin Trudeau’s first federal budget represents some significant departures from those under Stephen Harper, says economist Sherry Cooper

“It’s very different than the Conservative budgets,” Cooper, chief economist for Dominion Lending Centres, tells Yahoo Canada News. “Most obviously, they are not trying to balance the budget — and in fact are rescinding the balanced-budget legislation that was introduced by the Conservatives.”

But evaluating the fiscal outlooks of Harper and Trudeau, through their budgets, is not apples-to-apples, says University of Calgary economist Trevor Tombe.

“It’s actually not an easy comparison to make,” Tombe tells Yahoo Canada News, “given that so many of the years under Harper were defined by the stimulus package that was introduced during the 2008 financial crisis.”

Under that package, spending rose notably, Tombe says, but beginning in 2010 it declined until the Harper government first posted a surplus in 2014-15.

“Those years in between were really defined by that tightening of spending,” Tombe says, “to bring us back to where we were before the financial crisis — and then a bit lower.”

They also involved an overall increase in national debt, which had declined under Liberal prime ministers Jean Chrétien and Paul Martin. When Harper took office as prime minister, the federal debt was about $493 billion. Today, it’s about $616 billion — though the country still has the lowest debt-to-GDP ratio in the G7.

That low ratio is reflected in Canada’s triple-AAA rating, and that plus our low debt means we can borrow money at low interest rates, Cooper says.

“The perfect example of excessive debt levels is what’s going on in the EU with countries like Greece and Portugal and Spain,” she says. “We’re at the opposite end of that.”

A controversial deficit

According to the current budget plan, Canada’s deficits will add up to about $113 billion over five years. That means national debt will be about $729 billion when Trudeau’s term ends in 2019-20. 

The 2016-17 budget also marked a return to deficits, of nearly $30 billion. That number didn’t come as a surprise as it had been floated by the Liberals in recent weeks. And the slip into deficit first began before the election, in the first half of 2015.

About $10 billion of the forecast deficit can be attributed to the downturn in the economy, says Tombe. 

“Every one-per-cent decline in the growth rate of Canada’s economy will translate to about $5 billion to the government’s bottom line,” he says.

Another $6 billion is for the government’s contingency plan — a larger number than those seen under past Liberal finance ministers like Martin, where the fund was closer to about $3 billion.

The Trudeau government received some criticism for the size of the contingency fund when it was first announced. NDP MP Guy Caron said last month that Finance Minister Bill Morneau had inflated the deficit through measures like a large contingency fund in order to ease the pressure to keep campaign promises.

“Personally I don’t think $6 billion is too much,” Tombe says. It’s particularly prudent, he says, but will reduce the deficit if it isn’t required.

But the remaining $14 billion can be attributed to new budget measures, Tombe says, including those both announced since the election and in the budget. Based on this budget and the forecasts it provides, that increased spending should continue for the next few years, he says. 

What’s not expected to change is federal revenue as a share of GDP, Tombe says. That was about 16 per cent when Harper first came into office, he says, then dropped to 14-14.5 per cent after the GST cut. 

“The Liberals also plan to keep federal revenue right at 14 per cent,” Tombe says. “So the changes on the revenue side under Harper have remained, and the Liberals have given no indication that will change.” 

But if revenue is not expected to rise, and spending is, a deficit will result— and all indications are that we’ll see deficits for a while.

“What I think is surprising is not the headline number for this coming year, but the path of future deficits,” Tombe says. “They’re quite large. In no year over the next five will the deficit be less than $10 billion.”

Some of the spending in this budget is a one-time deal, Cooper says, for infrastructure projects that are needed across the country. But other components continue indefinitely — for example, the new benefits for parents that roll together several existing programs and will be received by 9 out of 10 families with children.

“The question becomes, how do you return to a balanced budget scenario when fiscal stimulus is no longer needed,” Cooper says, of that longer-term spending commitment.

The budget anticipates the spending measures will bump Canada’s GDP by about 0.5 per cent in 2016. But while the spending is aimed in part at stimulating an economy in its second year without growth, Tombe is not convinced this budget will have the hoped-for effect on the economy.

“The government assumes some pretty optimistic effects for how this budget will affect GDP and jobs,” Tombe says.

Both economists agree that to a certain degree, trying to predict what will happen to the Canadian economy in the coming years is an exercise in futility. The steep drop in oil that has hurt several provinces was not anticipated, for example, and is beyond the control of both Trudeau now and Harper before him. Significant events that can’t necessarily be predicted, like a terrorist attack or major natural disaster, could also affect the economy in ways that can’t be fully planned for.

“So much of what happens within Canada’s economy is not within the control of any Canadian government,” Cooper says.