Canada ‘rolling the dice’ on deficits

Gamble growth can outpace rise in public debts

• The federal government is betting that its massive new spending measures will stoke enough economic growth to outpace ballooning public debts, setting the stage for a race that will drag on for years following the COVID-19 pandemic.

Ottawa’s big bet comes as some experts warn that the Liberal government’s 2021 budget may have placed too little emphasis on spurring business investment — particularly that of large corporations — that could in turn limit Canada’s productive capacity in coming years.

The latest budget numbers show a swelling federal debt load that will double to $1.4 trillion by 2026, up from $721 billion before the pandemic. Those debts, while easily manageable today, could quickly become unwieldy should Ottawa fail to trim its spending habits and encourage a strong private sector revival, said Jack Mintz, professor at the University of Calgary’s School of Public Policy.

“It’s kind of like rolling the dice,” he said. “We are hoping that this huge amount of stimulus won’t impact inflation and interest rates even within the next five years or beyond.”

The 2021 budget included a wide variety of new spending measures, some of which sought to build out Canada’s economic productive capacity and incentivize investment. They include everything from billions in new spending for childcare support that could allow more women to remain in the workforce to tax writeoffs for small businesses buying machinery and equipment.

It comes as the government under Prime Minister

Justin Trudeau faces increasingly sharp calls from business groups and economists to provide a longer-term fiscal and economic plan, saying too much of Ottawa’s emphasis in recent years has been placed on the nearterm distribution of wealth.

Many of the tax incentives in particular target only small companies, Mintz said, or only allow for capital cost allowances (CCA) in the specific areas of clean tech or digitization, excluding more traditional industries. Some tax hikes, like a lower limit to how much interest cost large corporations can deduct, will raise costs for many larger firms.

“I don’t think they have an approach for the whole economy,” Mintz said.

“There’s little to no benefit to large firms. In fact, they’re going to be paying more taxes.”

On direct spending measures, a large proportion of taxpayer dollars went toward purely redistributive items like higher Old Age Security benefits and an expanded employment insurance regime. But a sizable portion of funds also went to areas that could arguably expand economic productivity, most notably a new $10-per day childcare program and a range of industrial innovation programs.

“I thought it was a bit of a blend,” said Doug Porter, chief economist at Bank of Montreal.

It remains unclear whether those programs will provided the necessary jolt. The federal government expects to post a $354-billion deficit in 2021, lower than the $381 billion projected late last year, largely because huge sums of spending were expanded or pushed into later years. Higher-than-expected economic growth also boosted government revenues.

The estimated deficit for 2022, by comparison, leapt to $154 billion, well higher than the $121 billion that was projected in November last year. The budget shortfall is expected to fall to $30 billion by 2026.

Meanwhile, economic growth is expected to reach 5.8 per cent this year, but slump back down to 1.8 per cent in 2025.

The Liberal government did not explicitly commit to a new fiscal anchor in the 2021 budget, but projected that the current federal debt-to-gdp ratio of around 51 per cent would continue to fall as deficits slowly taper off.

Still, Mintz said, the anchor should provide little solace given that the new ratio sits at a much higher threshold than before the pandemic, therefore technically giving Ottawa room to continue increasing program spending beyond its revenue base. Industry groups ahead of the budget called on Ottawa to ditch debt-to-gdp as its main anchor, and instead devote 10 per cent of revenues to debt servicing, saying it would immediately force the government to curb spending.

“All this talk about growth in the economy relative to the interest rate is irrelevant if you’re running record primary deficits,” Mintz said.

Deputy Finance Minister Michael Sabia reiterated on Monday that the federal government needs to maintain flexibility in coming years to adapt to the economic environment, telling reporters that fiscal anchors “should not be straitjackets.”

The deficit as a percentage of GDP will peak in 2021 at a record-high 16 per cent, but will fall back down to 1.1 per cent by 2026, according to government projections.

Finance Minister Chrystia Freeland has repeatedly claimed that spending during pandemic times would not be permanent, as a way to ensure fiscal prudence. In her fall economic statement last year, she said current deficit spending was “time-limited” and “distinct from the structural deficits of the 1990s.”

Even so, her budget on Monday includes a host of aforementioned program expansions that are explicitly permanent, including tens of billions of dollars for Old Age Security hikes, a widening of the employment insurance regime, and new childcare benefits, among other things.

At the same time, incentives that might create the economic growth needed to cover higher spending costs have been treated with a lower priority by the Liberal government, according to Mintz and numerous business lobby groups.

Among the top changes that could spur business investment is a reworking of Canada’s complicated and burdensome regulatory process, which Ottawa made steps to improve in 2018, but which has yet to show full results.

Freeland on Monday said the government would commit another $6.1 million to renew the External Advisory Committee on Regulatory Competitiveness, first assembled in 2018 as a way to cut needless red tape. Ottawa also said it would “launch a third round of targeted regulatory reviews” to help determine how streamlined regulations could aid in the COVID-19 recovery.

Another $1.9 billion will be spent over four years to recapitalize the so-called National Trade Corridors Fund, which Finance officials said could attract $2.7 billion in private sector investment toward expanding and improving roads, railways and other shipping routes.

Corporate tax rates on “zero-emissions” technology manufacturers like wind and solar makers will be cut in half, from the current rate of 15 per cent down to 7.5 per cent. Small business rates will also be halved, from nine per cent down to 4.5 per cent.

The federal government will also funnel $3 billion over five years to the Net Zero Accelerator, a new fund that falls within the Strategic Innovation Fund.