Economic Update: Ottawa’s Tight Game
Published in Le Devoir
(Canada) on 22 November 2018
by Manon Cornellier (link to original)
There is no need to state that the Canadian economy is doing well. About 550,000 more Canadians are working now than three years ago, with the lowest unemployment rates in 40 years, and salaries are rising faster than inflation. Also, the after-tax profitability of companies is above the historic average.
Nonetheless, President Donald Trump has sown uncertainty with his celebrated fiscal measures. There, Canada has an advantage; in order not to lose it, it must do something, and its response took up most of finance minister Bill Morneau’s press statement on Wednesday, Nov. 21. Very fortunately, he resisted the call by the conservative opposition and some business lobbies for steep tax cuts. Instead, he favored focused policies for encouraging investment in machinery, innovation and clean energy, which are all geared toward improving long-term competitiveness.
At once defensive and constructive, this strategy is needed under the present circumstances, yet it would never would have been decided without pressure from America. When an economy is going full steam, nothing justifies more stimulus with public funds. Rather, it is the time to strengthen reserves to face the inevitable slowdown.
The situation should have been splendid: without Wednesday’s statements, the deficit forecast for 2019-2020 would have been 5.3 billion CA$ (approximately $3.9 billion) less than the one registered for last March, all thanks to sound predictions of economic growth. Now, the new measures will total $5.5 billion CA$ (approximately $4.1 billion) for that year, of which 4.9 billion CA$ (approximately $3.7 billion) will be specially reserved in response to Trump. Over a period of five years, that means $14 billion out of $16 billion in new expenses to support investments.
This is not the place to pass judgment on the fairness of Morneau’s decisions, nor on his more minor statements of Nov. 21. Nonetheless, the social sector of the economy has long needed the support it deserves, and so does the media, which have at last found support that remains to be analyzed.
The magnitude of all the sums of money that are going to be dispensed, however, leads to the matter of what the government can do regarding unforeseen problems, given its limited room for maneuver. Its decision is hardly surprising, though. Since being elected, Prime Minister Justin Trudeau’s government has abandoned its promise of renewing a balanced budget to back debt and deficit reduction by stimulating the economy.
In absolute value terms, the 2019-2020 deficit forecast will be higher than last spring’s, but it will remain stable relative to the gross domestic product. As for the national debt, it will continue to decrease in proportion to the GDP, but at a slower pace than expected.
Overall, the situation is not so drastic, since Canada shows one of the better bills of financial health among the Group of Seven major industrial nations. The hitch is that the government seems incapable of resisting the temptation to sprinkle around small amounts of money, which does not always produce a strategic effect. This is highly imprudent, as witness several measures undertaken between the last budget and Morneau’s statement.
Also unfortunately, nothing indicates any change with regard to this bad habit less than a year from elections.
Nonetheless, President Donald Trump has sown uncertainty with his celebrated fiscal measures. There, Canada has an advantage; in order not to lose it, it must do something, and its response took up most of finance minister Bill Morneau’s press statement on Wednesday, Nov. 21. Very fortunately, he resisted the call by the conservative opposition and some business lobbies for steep tax cuts. Instead, he favored focused policies for encouraging investment in machinery, innovation and clean energy, which are all geared toward improving long-term competitiveness.
At once defensive and constructive, this strategy is needed under the present circumstances, yet it would never would have been decided without pressure from America. When an economy is going full steam, nothing justifies more stimulus with public funds. Rather, it is the time to strengthen reserves to face the inevitable slowdown.
The situation should have been splendid: without Wednesday’s statements, the deficit forecast for 2019-2020 would have been 5.3 billion CA$ (approximately $3.9 billion) less than the one registered for last March, all thanks to sound predictions of economic growth. Now, the new measures will total $5.5 billion CA$ (approximately $4.1 billion) for that year, of which 4.9 billion CA$ (approximately $3.7 billion) will be specially reserved in response to Trump. Over a period of five years, that means $14 billion out of $16 billion in new expenses to support investments.
This is not the place to pass judgment on the fairness of Morneau’s decisions, nor on his more minor statements of Nov. 21. Nonetheless, the social sector of the economy has long needed the support it deserves, and so does the media, which have at last found support that remains to be analyzed.
The magnitude of all the sums of money that are going to be dispensed, however, leads to the matter of what the government can do regarding unforeseen problems, given its limited room for maneuver. Its decision is hardly surprising, though. Since being elected, Prime Minister Justin Trudeau’s government has abandoned its promise of renewing a balanced budget to back debt and deficit reduction by stimulating the economy.
In absolute value terms, the 2019-2020 deficit forecast will be higher than last spring’s, but it will remain stable relative to the gross domestic product. As for the national debt, it will continue to decrease in proportion to the GDP, but at a slower pace than expected.
Overall, the situation is not so drastic, since Canada shows one of the better bills of financial health among the Group of Seven major industrial nations. The hitch is that the government seems incapable of resisting the temptation to sprinkle around small amounts of money, which does not always produce a strategic effect. This is highly imprudent, as witness several measures undertaken between the last budget and Morneau’s statement.
Also unfortunately, nothing indicates any change with regard to this bad habit less than a year from elections.
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