Fraser Forum

Improving economy further weakens case for Trudeau’s deficits

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Canada in its 150th year appears to have hit a string of good economic news. According to Statistics Canada, real GDP in May grew 0.6 per cent with increases in 14 out of 20 industrial sectors. June’s unemployment rate was 6.5 per cent, down 0.1 percentage points from the previous month.  

Moreover, the good news is reaching provinces unaccustomed to good economic news. Even laggard Quebec seems on the verge of becoming an economic powerhouse with an unemployment rate in June at six per cent—lower than Ontario’s and the national average. The longer-term outlook is also better with the August 2017 Consensus Forecast from FocusEconomics expecting that improved employment and buoyant household spending will sustain an uptick in Canadian growth this year.  

While the economy isn’t booming, this mounting evidence of sustained and broad-based economic growth has been recognized by the Bank of Canada, which raised the overnight bank rate in July for the first time since 2010.  

All of this raises the question—if Canada’s economy is improving, then why is the federal government continuing full steam ahead with large deficits?

Despite the spate of good news, there appears to be no reconsideration by the Ottawa that maybe it’s time for scaling down the deficit plans and thinking about a plan for a faster return to balanced budgets. Indeed, the response to the Bank of Canada rate hike is “concern” from officials within the Trudeau government that the bank is moving too quickly and that might cause a downturn.  

In fact, it seems that an improving Canadian economy may be incompatible with the government’s current fiscal approach of continuous deficits. There was a sharp rise in federal spending from 2015/16 to 2017/18. From 2017-18 to 2021-22, federal spending is forecast to rise further from $330.3 billion to $371.8 billion—an increase of 12.6 per cent. Despite an improving economy, the total in accumulated deficits over this period comes in at nearly $120 billion. While the government plans to cut the rate of spending growth starting in 2018/19, no clear strategy has been presented as to how this might occur.

The Trudeau government’s plan for building a strong middle class appears based on expanding spending on borrowed money. An improving economy delivers a double whammy to this plan—it further weakens the case for deficits, and will eventually result in higher interest rates that will raise the costs of debt service.

There may be a divergence in the views of the Bank of Canada and the federal government as to what exactly the narrative around improving economic indicators should be. For the bank, the improving economy means it’s time to raise interest rates, which would help restore some of the balance between savers and borrowers—a balance that has been tilted in favour of borrowers for too long.

For the Trudeau government, again, improving indicators undermine the case that the economy and the middle class needs help via deficit spending as well as increases the cost of doing so. Perhaps, the government can draw some inspiration from the fact that an improving economy means the middle class may actually be able to help itself and there can be a faster return to budget balance.