Federal Budget 2016: Quick Comment

Well it is Budget Day in Canada! Today’s federal budget is designed to address Canada’s uncertain economy by running large deficits to stimulate spending. Interestingly enough, the spending is somewhat more skewed towards people rather than things (infrastructure) which probably makes it a long term calculated pre-election strategy. 

This is a flawed economic strategy (not necessarily a flawed political strategy) because unlike 2008-09 when GDP actually fell, Canada (aside from Alberta) is not suffering from a deficiency in aggregate demand or consumer spending but from low economic productivity. Indeed, rather than grow the middle class, this budget will ultimately probably grow the future tax burden on the middle class as the federal debt rises to 648.7 billion dollars in 2016-17 and reaches 732.5 billion dollars by 2020-21. Debt service costs will rise from 25.7 to 35.5 billion dollars over the same period. This is a major fiscal shift and it is skewed towards spending on people - "the middle class" - rather than the much touted infrastructure needs of the country.  Spending on people is a good thing but one has to wonder how much of this spending will get recycled via the multiplier effect into stimulating the economy.  Moreover, I'm not so sure its the "middle class" that is suffering as it is the bottom third of the income distribution.

The deficit will be 29.4 billion dollars in 2016-17, 29 billion dollars in 2017-18, 22.8 billion dollars in 2018-19 and 14.3 billion dollars in 2020-21. Indeed, commitment to fiscal responsibility is eroded in this budget by the repeal of the Federal Balanced Budget Act and the failure to set any plan to balance the budget. Of course, I don't think that balanced budget acts are actually effective but it is the lack of any future target that really surprised me. I suppose the only saving grace is a rather large contingency fund of 6 billion dollars that is built into the projections.  This suggests the federal Liberals will actually have a smaller deficit this year than projected - again, a good political strategy.

As for infrastructure spending, well, some thoughts there. While investments in Canada’s human, social and physical infrastructure are needed, they must be done in a targeted manner that emphasizes productive investment or the end result will be wasted spending. Moreover, physical infrastructure spending in particular should be prioritized using evidenced based methods by an independent expert panel that includes accountants, economists, and engineers rather than simply political decisions. There is no assurance that we will be spared any federal infrastructure boondoggles in years to come.

Today’s federal budget is ultimately a page out of the Dalton McGuinty’s fiscal playbook for Ontario in that it aims to grow the Canadian economy by running a large deficit and debt while investing in infrastructure and assorted government programs. To date, this strategy has yet to successfully move Ontario out of its economic malaise and has resulted in Ontario becoming the most indebted province in the country and indeed one of the most indebted sub-national jurisdictions in the world. There is no reason to believe the over 100 billion dollars in federal deficit financing between now and 2021 will have any different outcome.

Comments

[Ron Waller]

What is Junior actually spending on infrastructure? A $20-billion infusion of cash over 2 years, or half of Harper's $40-billion "Economic Action Plan" of 2009-2010. An overall commitment of of $6-billion a year over 10 years (just to fix crumbling bridges and roads.)

According to Harper's 2009 budget, he boasted of $44.4-billion a year in "tax relief." Obviously, none of the $40-billion in stimulus remained a part of the deficit by 2011, despite a lot of folklore that still persists today. But this certainly puts the 'whopping' $6-billion a year in a whole different perspective.

So how on Earth did the Liberals end up with a $30-billion deficit? Not from infrastructure spending. And yes, this little bit of spending will do nothing to prime an gaping deficit in demand, one that exists in the entire global economy.

If he had created a $30-billion deficit with tax cuts, there would've been a lot less complaining about debt financing, that's for sure. (Surely new and old tax cuts must account for lion's share.)

But he the might as well have. These Red Tories in liberal's clothing give centrism a bad name and set the stage for more destructive conservative policies in the future. (But I'm sure the past 30-year downward spiral will correct itself any moment now — well, after these spendthrift Liberals are rightfully turfed from office.)

[Tim Faber]

As a professional economist, why quote absolute debt and deficit numbers rather than Debt-to-GDP?

If Debt-to-GDP actually is more or less flat over the next 5 years, isn't it true that debt is not growing in real terms?

[Nik]

Why are you writing in purely nominal terms? If you look at deficit-to-GDP and debt servicing as a percentage of projected revenues, it's not nearly as dire as you paint it. You've also neglected to mention that they softened the deficit numbers by projecting real growth below private sector projections. Contingency fund plus softening of growth projections removes $12 billion from the deficit. Moving it from 1.5% of GDP to 0.9% of GDP in 16-17.

Your post strikes me as more political than economical.

[Livio Di Matteo]

The government is forecasting a stable or flat debt to GDP ratio but I am not convinced that is going to be the case given the current slow rate of growth. Whether interest rates stay as low as they currently are is also another factor influencing the debt to GDP ratio.

[Damien]

If you believe GDP growth will be lower than predicted in the budget doesn't that also commit you to believing that the interest rate will be lower than predicted in the budget? As long as you believe their future budgets will be in the same ballpark as what they've shown in this budget, then it seems like the deficit-to-GDP ratio will be somewhere in the range of 1-1.5%, and that debt-to-GDP will remain roughly stable. Hardly seems worth all the hand-wringing.

[Daniel Gaston]

So are you expecting growth to be well below private sector expectations as well? Because the Liberals budget projections were already below that of what the banks are predicting.

[Erik Lund]

"because unlike 2008-09 when GDP actually fell, Canada (aside from Alberta) is not suffering from a deficiency in aggregate demand or consumer spending but from low economic productivity."

I'm no economist, but I do work retail, and I can tell you that Vancouver, anyway, is suffering from not enough people demanding groceries. I get that my impressions aren't very scientific, but when I try to wrap my head around complex concepts, I'm told that inflation is too much money chasing too few goods. That'd make deflation "too little money chasing too many goods." Right? Well, I can take you around the backroom and show you "too many goods," and stagnant wages would seem to suggest "too little money." I gather that the whole thing about drawing the line between "inflation," and "deflation" is some kind of gigantic economist tickle fight, but if the Bank of Canada is saying that it's aiming for a 2% inflation rate, and the actual inflation rate always comes in below this (for certain values of "inflation"), then, you know, deflationish. I think? The fact that everyone else on Earth is talking about deficiency in aggregate demand makes me a little more confident that that is what is actually happening.

So, you know, an argument to the contrary would be nice.

Second, while I'm as pleased as the next person to be persistently accused of being lazy for my entire working life ("but from low economic productivity," repeat 'till your talking parts get tired for several decades), I'm a little at a loss as to how Canadians come to have such low productivity. I do the same job as my American counterparts with the same tools. What gives? It's not like economists have been able to explain why Canadians are so gosh-darned lazy. Er, unproductive. (I wonder about Canadian economists at Canadian universities. Are they producing enough?)

Well, except for one explanation. That old one about American advantages of scale. More Americans means larger distribution centres, bigger production runs, etc. This is a bit strange. Some of the crankier know-nothing commentators around here are on about how Canada's population is too low, and that something should be done about it, but it isn't something you'd expect from the blog headliners. Because if that were a problem, it would be a five alarm fire level problem. And since no-one around here is pullling the fire alarm, I'm going to go with my impressionistic conclusion that the basic takeaway around here is that if Canadians would just buy less and work more, the Bank of Canada could solve all of our problems by just changing their victory conditions.

Fair enough, though, because the only other obvious solution is for the Government to make sure that there's more money chasing those goods. Which. . .

Oh.

[sustain_ability]

http://www.forbes.com/sites/stevekeen/2016/03/27/the-seven-countries-most-vulnerable-to-a-debt-crisis/#e3cb9134edcd

"..The bottom line is that private sector expenditure in an economy can be measured as the sum of GDP plus the change in credit, and crises occur when (a) the ratio of private debt to GDP is large; (b) growing quickly compared to GDP. When the growth of credit falls—as it eventually must, as growing debt servicing exhausts the funds available to finance it, new borrowers baulk at entry costs to house purchases, and numerous euphoric and Ponzi-based debt-financed schemes fail—then the change in credit falls, and can go negative, thus reducing demand rather than adding to it.."

[Angel Healy]

Speaking of "evidence-based methods", I think it would be appropriate that the different government bodies, not only Canada per se, the Big Data and IoT network in consolidating insights on what is greatly needed to have a bigger allocation and what needs to be addressed. In that way, the Big Data and IoT will be tested in a greater scale. It'll be a symbiotic relationship.