The Liberal government might have more room to manoeuvre on stimulus spending without damaging its fiscal health, say economists.
Prime Minister Justin Trudeau and his government are going to unveil their budget in the coming months. Originally, Trudeau’s election platform made room not less than $5 billion annually in new infrastructure spending to help pump much needed stimulus into Canada’s struggling economy.
But Bank of America Merrill Lynch economist Emanuella Enenajor states that, based on her calculations, the federal government could spend around an additional $15 billion annually and still meet its goal of lowering the debt-to-GDP ratio.
“Although there continue to be many unknowns with the timing and content from the Federal budget, we argue that Ottawa has room to invest 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 which have been hard hit by the rapid decline of oil prices, including Alberta and Saskatchewan.
Enenajor’s calculations consider 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 work for middle income earners, will drive up the deficit.
The extra wiggle room would certainly be a boon to a government that faces pressure to resuscitate a struggling Canadian economy. The Bank of Canada said recently that it was holding its benchmark interest rate unchanged as it awaits news of methods 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 will work on keeping the ratio on a downward trajectory. Even if debt grows within this scenario, as long as the economy grows faster, the ratio can continue to be lowered.
The Liberals had originally pledged they’d go back to a balanced budget after their mandate, before changing their focus to reduce the debt-to-GDP. Deficit expenses are likely to stack up, with economists at National Bank of Canada saying last week the government could face the prospect of $50 billion in deficits in just two years.
“Indeed, the federal stimulus promised through the Liberals around the campaign trail might take the government budget shortfall to roughly $25 billion a year, or perhaps a bit above one per cent of GDP,” said economists Krishen Rangasamy and Warren Lovely in note.
They continued to note, however, that Ottawa is within a strong enough fiscal position that could manage to operate a couple years of deficits as huge as $30- to 35-billion without “eroding its long-term fiscal sustainability.”
Enenajor said the government should use any additional stimulus paying for the best measures. She questions the effects from the focus on tax cuts in the current budget, noting that historically, infrastructure has been a stronger section 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 effect on GDP associated with a dollar of presidency spending.”
Infrastructure spending, however, may not necessarily have an immediate impact. Research shows spending on projects already underway has little additional economic impact and new projects won’t necessarily be shovel ready, and therefore economic growth will lag spending.
Paul Beaudry, professor at the Vancouver School of Economics at the University of British Columbia, said the government should be careful not to rush spending and make sure it’s targeted.
“The fundamental problem is not a insufficient spending, if that was, that’s when you rush shovel-ready projects to obtain people moving again,” he explained.
Instead, the real problem is depressed resource prices, which could be low for quite a while before they rebound. Beaudry asserted means that any stimulus spending needs to be focused on retooling the Canadian economy from that sector to sit in the modification. Stimulus should go hand-in-hand with other initiatives such as retraining workers, he added.
“We must structurally adjust to this transformation that could be rather persistent,” he explained. “Whenever we have big sectoral shocks such as this, we should be thinking about spending to assist the economy adjust this, not merely getting the money flowing as soon as we are able to.”