Trudeau Earns Passing Grades in Pre-Budget Scorecard

  • Prime minister gets a ‘D’ for Deficit, says RBC’s Wright
  • Positive marks on macroeconomic policy and do no harm

Prime Minister Justin Trudeau’s March 22 budget, his second since taking power in late 2015, offers an opportunity to take stock of his government’s economic performance to date.

Here is the state of play:

  • Trudeau inherited a struggling economy, battered by collapsing oil prices, that’s showing signs of recovery in part as commodity prices rebound. Growth in the second half of last year was the fastest since 2013, while the jobless rate has returned to post-recession lows.
  • On the flip side, wages are rising at the slowest pace in more than a decade and are no longer keeping up with the cost of living. Canadians are working fewer hours, even as employment rises, all of which suggests the quality of new jobs is not as strong.
  • Meanwhile, businesses are curtailing investment, exporters are struggling to grow sales and the country is relying increasingly on a real estate boom and spending from indebted households, a precarious combination.

Overall, it’s been an average performance, if currencies are anything to go by. Since Trudeau’s election victory on Oct. 19, Canada’s currency has dropped 3.4 percent, ninth best among 16 major currencies. The British pound, as way of comparison is down 21 percent over that time.

Do No Harm

First things first: Trudeau’ government seems to be getting the important things right.

In a recent blog post ahead of the U.K. budget, economics writer Chris Dillow lists two reasonable yardsticks of good economic management: do no harm and get macroeconomic policy right. Trudeau gets positive marks on both fronts.

While Canada’s prime minister tilts his rhetoric to the left, his government defaults to an “economy first” pragmatism when it counts the most. Look no further than Trudeau’s deferential treatment of President Donald Trump, his government’s delicate handling of Canada’s housing market, its pro-pipeline policy and his finance minister’s reluctance to add further to the nation’s deficit in spite of some internal pressure to do so.

More expansive fiscal policy has helped at a time of slumping demand and increasingly ineffective monetary policy. Whether the governing Liberals rein in spending if the economy accelerates -- also good macroeconomic policy -- is another matter.

Fiscal Anchor

Canada has had more or less a balanced budget anchor for two decades, until now. Today it’s something a lot less precise: Trudeau is pledging to reduce the country’s debt-to-GDP by the end of his mandate. No specific target.

Worse, the anchor has changed multiple times to fit the circumstances. Adding to the confusion, Trudeau’s government has actually never explicitly abandoned the balanced budget pledge.

Trudeau gets a “D for deficits,” according to Craig Wright, chief economist at Royal Bank of Canada, who said he would like to see an explicit plan to return the country to balance.

Speed Limit

Boosting the country’s waning long-term growth rate is a priority and there are only two ways to do this -- increase the number of workers or make workers more productive. A blue-chip panel of advisers led by Dominic Barton of McKinsey & Co. has come up with a “suite” of recommendations, many of which will make an appearance in the budget including smart ways to deliver infrastructure spending.

Infrastructure plays into the productivity agenda, it provides a new dollop of spending at a time when the country is lacking growth drivers, and it fills in the business investment hole.

Foreign Investment

Canada’s economy has relied heavily on foreign borrowing since the recession and the worry is that much of that foreign money is increasingly short-term and going into nonproductive areas, such as fueling the country’s housing market. Which raises another benefit of infrastructure. If the federal government can help develop a portfolio of new infrastructure projects that gives foreign investors something else to buy into other than housing, that’s also unambiguously good.

Innovation

The budget is supposed to be the innovation budget, but whether a government that can’t pay its own workers or keep its websites operating has anything meaningful to say about innovation is to be determined.

The Liberals last year allocated C$800 million “to support innovation networks and clusters as part of the Government’s upcoming Innovation Agenda.”

Competition Policy

Canada has some of the highest barriers to foreign investment and competition in key industries among industrialized nations and there is no sign of that changing any time soon. The Liberals have talked about competition in the context of attracting more foreign investment and freeing up provincial trade barriers, but have said little to unsettle the nation’s home-grown oligopolies.

Diversity

Introducing diversity into the economic conversation is where Trudeau has been his most original. The idea speaks directly to the economy’s demographic challenges. One of the biggest drags on Canadian growth has been the slow decline of the country’s labor participation rate, which is the percentage of the Canadians working or looking for work.

It dovetails into immigration policy. The native-born part of the labor force in Canada has begun to shrink, meaning immigrants are already the main source of employment growth.

And it jibes with Trudeau’s inclusive growth narrative -- getting more women, lower income families and indigenous people into the labor force.

Where the government seems to have less to talk about is with the decline in the participation rates for men, who have suffered disproportionately from the long-term decline of goods-producing industries. This is the weakest segment of the country’s labor market but the government’s economic advisory council issued a 12-page report on Canada’s participation rates that made no reference to the problem at all.

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