politics

Rising Rates and Trump’s Threats Tie Trudeau’s Hands in Budget

Updated on
  • Canadian government to lay out its 2018 fiscal plan Tuesday
  • Few new measures expected amid Nafta talks, U.S. tax changes
The Three Sticking Points in Nafta Discussions

Justin Trudeau, pinched for new cash and facing calls from businesses to tackle Canada’s deteriorating competitiveness, is turning his focus to lower-cost political priorities such as gender equality and science in his government’s third budget.

Trudeau’s finance chief Bill Morneau releases a finance plan Tuesday around 4 p.m. in Ottawa that is expected to hold off from major new funding initiatives and deal largely with gender policy, such as boosting women’s workforce participation rates. Morneau has signed he’ll keep to a plan of slow deficit reduction while lowering the ratio of federal debt to gross domestic product.

The plan comes amid calls to cut corporate taxes as businesses worry about the risks posed by U.S. President Donald Trump’s policies, at a time when the country’s growth is slowing, pinched by the uncertainty associated with ongoing Nafta talks and a wider discount for Alberta oil. Canada is losing a competitive edge, partly due to U.S. tax reform and the threat Trump could withdraw from the North American Free Trade Agreement, business groups warn. Morneau is under pressure to act, but all signs are that he’ll wait.

“From a macroeconomic perspective, I don’t expect a whole lot,” said Jean-Francois Perrault, chief economist at Bank of Nova Scotia in Toronto and a former top finance department official. He called on Morneau to keep his “powder dry” to preserve leeway to respond to crises down the road, and to use this budget to signal “he’s watching the situation carefully and is ready to respond if he needs to.”

Read more about how rising debt costs will squeeze Trudeau’s agenda

The most recent federal figures, released last fall, projected C$86.5 billion ($68 billion) in deficits over five years, beginning with the fiscal year that ends March 31, through 2021-22. Morneau projected the debt-to-GDP ratio would fall to 29.1 percent from 30.5 percent over that period.

However, there are signs Morneau has less wiggle room than before. While his deficit is modest by international standards, it’s seen as a political liability at home. His government has already hiked its forecast program expenses for the next three fiscal years.

Next year’s budget is more politically significant, with an election due that fall. Trudeau will also create a commission to study options for the creation of a national plan to cover pharmaceutical costs, according to reports by the Canadian Broadcasting Corp., a potentially big-ticket item that would further strain federal spending.

Meanwhile, rising interest rates and mounting debt have ended a run of windfalls from declining debt service costs, that Morneau and his predecessors have used to cut taxes and boost spending.

Trump Effect

Morneau is delivering his budget with the latest round of Nafta talks underway in Mexico City. There have been widespread calls from the private sector for Canada to move to increase business competitiveness.

“I would like to see the competitiveness of Canada remain at the forefront,” Royal Bank of Canada Chief Financial Officer Rod Bolger said in a telephone interview last week. “I don’t think tax reform is going to be in there,” he said, adding the federal government should focus on creating a strong economy.

The Business Council of Canada, representing chief executives of many of the country’s biggest firms, warned “Canada must respond now” by, for example, cutting business taxes, allowing business investments to be more easily written off or punting planned changes to taxation of investments held in private corporations.

The Canadian Manufacturers and Exporters industry group also called for a tax cut and a business investment tax credit. “Similar to the U.S., we believe that Canada and its provinces should be looking at a range of tax reforms to boost investment and growth,” Dennis Darby, CME president and chief executive officer, said in a letter on behalf of several manufacturing groups.

Tom Caldwell, chairman of Caldwell Financial Ltd. and CEO of Urbana Corp., said he’d rather see Morneau balance the budget than cut taxes to compete with the U.S. “Less is more,” he said. “As far as governments go my expectations are always fairly low and I’m rarely disappointed.” Morneau said this month he’d “carefully consider” U.S. tax changes, while saying he thinks Canada’s tax system is already competitive.

Infrastructure Gridlock

The budget will be a key mile-marker for one of the Trudeau government’s hallmark pledges to hike infrastructure spending in a bid to stoke growth, something Bank of Canada Governor Stephen Poloz has said the economy can look forward to.

In late 2016, Morneau announced C$81 billion in new infrastructure funding, bringing the federal government total to C$186.7 billion over 12 years, roughly doubling its spending rate on projects such as roads and transit. There are some signs the government is struggling to get all the money out the door, forcing it to be potentially bumped -- or “reprofiled,” in government slang -- into different years.

“Ottawa clearly has a kind of structural surplus of infrastructure dollars that will continue to go perpetually unspent,” said Sean Speer, a senior fellow for fiscal policy at the Macdonald-Laurier Institute and former economic adviser to Trudeau’s predecessor, Stephen Harper. “I honestly do think they’re in a world of perpetual reprofile.”

A Morneau spokeswoman declined to comment on infrastructure spending. Brook Simpson, a spokesman for Infrastructure Minister Amarjeet Sohi, said federal money “is a lagging indicator to project activity,” as money is often only released after a project is done. Any money that doesn’t flow is reprofiled to another year and still available, he said.

— With assistance by Kristine Owram, Doug Alexander, and Erik Hertzberg

(Updates with pharmacare plan in seventh paragraph.)
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