The Liberal government might have more room to manoeuvre on stimulus spending with no damage its fiscal health, say economists.
Prime Minister Justin Trudeau and his government are set to unveil their budget within the coming months. Originally, Trudeau’s election platform made room for at least $5 billion annually in new infrastructure spending to help pump much needed stimulus into Canada’s struggling economy.
But Bank of the usa Merrill Lynch economist Emanuella Enenajor says that, based on her calculations, the government could spend as much as an additional $15 billion annually and still meet its goal of decreasing the debt-to-GDP ratio.
“Although there are still many unknowns with the timing and content from the Federal budget, we reason that Ottawa has room to spend more than initially announced, assisting to ease the pain sensation from the oil shock,” she said.
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Recent reports indicate that Trudeau is already looking at fast-tracking stimulus to provinces that have been hard hit by the rapid decline of oil prices, including Alberta and Saskatchewan.
Enenajor’s calculations take into account a predicted $1.6 billion budget shortfall stemming from the new tax measures the federal government is undertaking. The Parliamentary Budget Officer calculated the measures, set to raise the tax rate on incomes over $200,000 and cut it for middle income earners, will increase the deficit.
The extra wiggle room would likely be a boon to some government that faces pressure to resuscitate a struggling Canadian economy. The financial institution of Canada said recently it’s holding its benchmark interest rate unchanged as it awaits news of how much stimulus will be allocated in the upcoming federal budget.
Finance Minister Bill Morneau last November adopted debt-to-GDP as a key “fiscal anchor,” saying he’ll work on keeping the ratio on the downward trajectory. Even when debt grows in this scenario, as long as the economy grows faster, the ratio could be lowered.
The Liberals had originally pledged they would go back to a well-balanced budget by the end of their mandate, before changing their focus to lower the debt-to-GDP. Deficit spending is expected to stack up, with economists at National Bank of Canada saying a week ago the government could face the possibilities of $50 billion in deficits in only two years.
“Indeed, the government stimulus promised by the Liberals on the campaign trail might take the federal budget shortfall to roughly $25 billion annually, or a bit above one percent of GDP,” said economists Krishen Rangasamy and Warren Lovely in note.
They went on to note, however, that Ottawa is within a strong enough fiscal position that could afford to operate a couple years of deficits as large as $30- to 35-billion without “eroding its long-term fiscal sustainability.”
Enenajor said the federal government should use any additional stimulus spending on the right measures. She questions the effects of the focus on tax cuts in the current budget, noting that historically, infrastructure is a stronger area of returns for governments.
“Most studies around the impact of public spending highlight infrastructure as having the best bang-for-buck,” she noted. “Economists make reference to this bang-for-buck as the ‘fiscal multiplier’: the dollar impact on GDP of a dollar of presidency spending.”
Infrastructure spending, however, might not necessarily have an immediate impact. Research shows paying for projects already underway has little additional economic impact and new projects won’t necessarily be shovel ready, meaning that economic growth will lag spending.
Paul Beaudry, professor at the Vancouver School of Economics at the University of Bc, said the federal government ought to be careful not to rush spending and ensure it’s targeted.
“The essential issue is not a insufficient spending, if that was, that’s when you rush shovel-ready projects to get people moving again,” he said.
Instead, the actual issue is depressed resource prices, which could be low for quite a while before they rebound. Beaudry asserted implies that any stimulus spending needs to be focused on retooling the Canadian economy from that sector to adjust to the change. Stimulus is going hand-in-hand with other initiatives for example retraining workers, he added.
“We must structurally adjust to this change which could be quite persistent,” he said. “Whenever we have big sectoral shocks such as this, we should be considering spending to assist the economy adjust this, not simply obtaining the money flowing as quickly as we can.”
jshmuel@nationalpost.com
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