Big bank economists flag federal budget’s happy-go-lucky stance on deficit

Click to play video: 'Federal Budget 2018: Trudeau, Morneau show off budget in House foyer' Federal Budget 2018: Trudeau, Morneau show off budget in House foyer
WATCH: Trudeau, Morneau show off budget in House foyer – Feb 27, 2018

Finance Minister Bill Morneau’s federal budget missed a good opportunity to plan for a rainy day that might come sooner rather than later, economists at almost all of Canada’s big banks are warning.

“Faced with an improved fiscal starting point, the federal government has chosen to spend the windfall,” TD economists Derek Burleton and Brian DePratto wrote in their review of the budget on Tuesday.

READ MORE: Trudeau government reveals the 2018 federal budget

The budget is forecasting an $18-billion shortfall for the fiscal year running from April 1, 2018, to March 31, 2019. The deficit is projected to gradually shrink to just over $12 billion in 2022-2023.

READ MORE: Canada’s 2018 budget contains no timetable to balance books

Those numbers fly in the face of the Liberals’ campaign promise to keep deficits at around $10 billion per year and eventually balancing the budget. But when you look at the government’s overall debt – which is, roughly, the sum of yearly shortfalls and interest – it doesn’t look that big. If the government’s projections hold up, the size of the debt compared to Canada’s overall economy will slowly dip below 30 per cent, which most economists would agree is not very big.

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Still, the government could have shaved $19.8 billion in deficits over the next five years by saving instead of spending the extra money it has found itself with thanks to unexpectedly strong economic growth and lower spending in some corners of the government, according to an analysis by Scotiabank Jean-François Perrault and Mary Webb.

Instead, the government chose to spend as much as it could without upsetting the debt-to-GDP ratio. The budget announced billions of dollars in funding to help more women, low-income workers and minorities join the labour force and support innovation and scientific research.

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Both of those could help boost Canada’s economic growth in the long term, but “in our view, it would have been more prudent to set some of the $19.8 billion in savings aside in the event that they are needed to deal with [future] challenges,” Perrault and Webb write.

WATCH: Bill Morneau hails commitment to gender equality with 2018 federal budget

Click to play video: 'Federal Budget 2018: Bill Morneau hails commitment to gender equality' Federal Budget 2018: Bill Morneau hails commitment to gender equality
Federal Budget 2018: Bill Morneau hails commitment to gender equality – Feb 27, 2018

No countermeasures to Trump’s tax cuts

“We would have liked to see measures to address the challenges facing Canadian businesses,” wrote RBC economists Paul Ferley and Josh Nye. But, they note, “there was little mention of improving competitiveness.”

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Canada has lost the comparative advantage it enjoyed vis-a-vis the U.S. when President Donald Trump’s tax cuts lowered the average corporate tax rate to about 26 per cent, below Canada’s average rate of roughly 27 per cent.

The Trudeau government has said it doesn’t intend to cut taxes just because the U.S. did.

READ MORE: No tax cuts but low-income workers and small-business owners can breathe easier

Some economists are saying there’s a case for not following Trump’s example headlong. After all, U.S. government debt is pushing 80 per cent of GDP, and the tax cuts may cause the American economy to overheat, which would feed inflation.

Still, the government could have at least offered to take a hard look at updating the country’s tax code. However, “any hopes for a government task force on tax reform were disappointed,” noted the TD report.

WATCH: Conservatives slam $18B deficit

Click to play video: 'Federal Budget 2018: Conservatives slam $18B deficit' Federal Budget 2018: Conservatives slam $18B deficit
Federal Budget 2018: Conservatives slam $18B deficit – Feb 27, 2018

No buffer against a NAFTA uncertainty or a recession either

The other potential near-term challenges Canadians economists see are a failure or trim-back of NAFTA and an economic downturn.

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“The economic outlook is not without storm clouds — including the potential for a bad outcome from NAFTA negotiations. Now is the time to return to a balanced budget in order to better deal with any future negative shock to the economy,” reads the RBC report.

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Also, after several years of expansion and gangbusters growth in 2017, many economists believe Canada’s economy might hit the breakes soon.

Over the next five years, “we are likely to experience a significant economic slowdown, possibly even a recession. If this occurs, it will require a substantial fiscal response, as was the case in the previous recession,” write Perrault and Webb at Scotiabank.

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Acknowledging business concerns about the outcome of NAFTA negotiations and the Trump tax cuts, Morneau said on Tuesday that he wants to play it by ear.

“We will be vigilant in making sure Canada remains the best place to invest, create jobs and do business – and we will do this in a responsible and careful way, letting evidence, and not emotion, guide our decisions,” the minister said.

Economists agree that we don’t know yet how exactly NAFTA or Trump’s policies will play out. Still, if Ottawa does end up having to come to the rescue, it’s not clear where the money will come from.


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