Trudeau to Make Case That Growth and Redistribution Can Coexist

  • Federal budget will focus on Canada’s lackluster economy
  • Is more stimulus needed, with fastest GDP pace since 2013?

Prime Minister Justin Trudeau will try to convince Canadians he’s just as good at generating growth as he is at handing out checks.

Bill Morneau, his finance minister, releases a budget at 4 p.m. Ottawa time that will address the country’s lackluster economic performance, and will lay out how the Liberals, who came to power in late 2015, intend to accelerate infrastructure spending and drive innovation.

Putting together a credible growth agenda will help shore up support for a deficit spending plan that will see the country borrow almost C$100 billion ($76 billion) in Trudeau’s first mandate. The aim: persuade Canadians the social and redistributive policies implemented in last year’s budget can go hand-in-hand with a stronger economy.

“It’s going to be hard for them to deliver something in this budget that’s really going to satisfy people who want to see something happen,” said Bill Robson, chief executive officer at the C.D. Howe Institute, a Toronto-based think tank. “The clock is ticking and it doesn’t last forever.”

Trudeau, the first leader in a generation to introduce income inequality into Canada’s political debate, has always sought to root his redistribution politics in economics. Infrastructure is crumbling and growth is modest at best. Incomes for the many remain stagnant while growing for the rich few. Now with interest rates at record lows there’s an historic opportunity to use the borrowing power of the federal government to enhance growth for years to come. Or so the argument goes.

The Liberals have delivered on the benefits: the prime minister’s first budget ramped up handouts to just about everyone -- parents, veterans, the unemployed, seniors -- while cutting taxes for the vast majority of Canadians, and increasing them on the highest earners.

Deficit Aversion

The problem is that while budget deficits have mounted, there are few visible signs that anything is happening on the infrastructure front. Canada’s parliamentary budget office reported last month the federal government, which plans to spend C$187 billion over 12 years on infrastructure, had identified projects for less than half of the money allocated through 2018.

Deficits matter in Canada, with a collective aversion to debt that was cemented in the mid-1990s amid rating downgrades, a falling currency and a national unity crisis. In the 2015 election campaign, Trudeau pledged to run deficits but for only three years.

Erik Hertzberg/Bloomberg

The latest long-term fiscal forecasts published by the finance department show the federal government isn’t on pace for a balanced budget any time soon. In a report released Friday, Scotiabank estimates deficits will surpass the C$30 billion mark this year and remain there until 2019.

Complicating matters for Trudeau is that Canada’s economy is showing signs of picking up as oil prices firm and global demand recovers, which undermines the stimulus argument for deficits. Growth in the second half of last year was the fastest since 2013, while the jobless rate has returned to post-recession lows.

Possible Headache

“The economy is not begging out for huge Keynesian style fiscal stimulus,” said Don Drummond, an adjunct professor at Queen’s University and a former associate deputy minister at the finance department. “They have kind of lost that aspect of it.”

Another headache: possible tax reform in the U.S. may hobble the Liberal government’s plan to finance part of its budget gap by eliminating tax credits and deductions that go primarily to high-income earners. That could mean even higher deficits than thought.

Still, infrastructure is popular. A December poll by Nanos Research Group for the Canadian Council for Public-Private Partnerships found that 58 percent of Canadians believe the government invests too little in infrastructure.

So is innovation, an issue on which the government has promised to say more about in this budget and has set aside C$800 million for.

“Deficits associated with infrastructure are a lot more palatable then deficits associated with transfers,” said Nik Nanos, chief executive of polling firm Nanos Research Group.

— With assistance by Erik Hertzberg

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