Canadian Manufacturing

Despite scorching economy, Morneau says budget deficits will continue

Finance Minister Bill Morneau said Ottawa would stick with the spending strategy because it's designed to lift the economy over the long term by focusing on the country's debt-to-GDP ratio instead of balanced budgets


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OTTAWA—Federal Finance Minister Bill Morneau suggests he has no plans to provide a timetable for returning Ottawa’s books to balance—even with a scorching economy.

Morneau credited the strong economic performance to the Trudeau government’s strategy to run deficits, which helped it finance measures such as lower income-tax rates for middle earners and enhanced child benefits.

Moving forward, he said that Ottawa intended to pursue its plan to invest more than $180 billion into infrastructure over the next 11 years. That spending is projected to contribute to annual, multibillion-dollar shortfalls across Ottawa’s five-year budgetary outlook—and perhaps beyond.

Morneau’s remarks outside a cabinet retreat in St. John’s came after months of impressive economic data, including a recent report showing growth expanded at an annualized rate of 4.5 per cent in the second quarter.

“We find ourselves in this positive position because of the economic approach we’ve taken,” he told reporters after being asked if the improved fiscal outlook meant he’d produce a timeline to eliminate the deficit in his fall economic update.

“We’re going to continue down that path and we’re going to do it in a fiscally responsible way.”

The Liberals’ deficit track has faced criticism.

Conservative opponents have long been critical about the government’s plan to add to the federal debt to fund new measures, while some economists have urged Ottawa to limit fiscal uncertainty by mapping out a plan to return to balance.

More recently, experts have also warned that Ottawa should consider delaying its nearer-term infrastructure investments to avoid the risk of overheating the already-sizzling economy.

The economy’s surprisingly powerful start to the year is expected to improve the federal bottom line outlined in the government’s March budget.

At the time, Morneau forecasted a $28.5-billion deficit for 2017-18, including a $3-billion accounting adjustment for risk.

A new analysis released this week by a University of Ottawa think tank predicts the deficit is on track to be about $6.5 billion smaller this year. The shortfall is set to shrink thanks to an economic expansion that easily topped federal projections, said the Institute of Fiscal Studies and Democracy.

The think tank, led by former parliamentary budget officer Kevin Page, also said there’s “little doubt” the federal measures, such as increased child benefits and early infrastructure spending, have contributed to Canada’s improved economic performance.

Conservative MP Pierre Poilievre said the Liberals were fortunate to have inherited a solid financial situation from the Harper government and to enjoy the benefits of a strengthening U.S. economy.

Poilievre said the government should balance the books now while the “going’s good.”

If not, he warned that rising interest rates will leave households and the government increasingly indebted. Over time, the higher rates will also gradually boost Ottawa’s debt-servicing costs, he added.

“Now is the time to balance the budget and strengthen our finances, rather than continuing to pile on new debt,” Poilievre said Tuesday in an interview.

Morneau insisted Tuesday that, since taking office, the government’s approach has put more disposable income in consumers’ pockets, which they’ve put back into the economy.

On infrastructure, Morneau said Ottawa would stick with the spending strategy because it’s designed to lift the economy over the long term.

To guide the government’s deficit decisions, he added it would keep its focus on the country’s debt-to-GDP ratio—a measure of the public debt burden.

The government has promised to lower the ratio over the Liberal mandate and views it as a so-called fiscal anchor, rather than eliminating the deficit.

“We expect that we’ll be able to do even better than we might have thought in the past, in terms of our ability to manage that,” Morneau said of the ratio.

“That will be our continuing measurement tool.”

The Liberals won the 2015 election on a platform that pledged to invest billions in infrastructure and child benefits as a way to re-energize the economy. They had promised annual shortfalls would not surpass $10 billion during the first couple years of their mandate and to return to balance by 2019-20.

However, a few months after taking office the government abandoned those vows, citing a weaker-than-expected economy.


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