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Finlayson Op-Ed: Liberals step up state involvement, downplay role of enterprise in economy (Business in Vancouver)

Bill Morneau’s spending-heavy budget underscores two important shifts in the country’s economic and political landscape.

The first is Canada’s diminished economic prospects in an era of weak global growth and sluggish commodity markets. In the past two years, Canada has been buffeted by a substantial “terms of trade” shock, as the prices of our exports have fallen relative to what we pay for imports. Commodity prices, in particular, have plunged, a real blow for an economy that relies on natural resource industries for half of its exports and two-fifths of business investment.

A second important shift is the election of a federal government with different priorities than those of its predecessor. Compared with the defeated Conservative regime, Justin Trudeau’s administration is committed to a more activist agenda on income inequality, the environment, urban issues and the needs of First Nations communities. The new budget reflects these priorities, mainly by boosting federal expenditures in all of the above areas. Overall, program spending is slated to rise by a hefty 7.6%  in 2016-17 and 4.5%  the following year. Whereas the Stephen Harper government was wedded to shrinking Ottawa’s footprint, the Liberals envisage a greater federal role in economic and social affairs.

Thus, the rhetorical preoccupation with balanced budgets that has long been a staple of Canadian politics is cast aside, as the Trudeau government prepares for a string of deficits. While the updated five-year fiscal projections will alarm some, it is helpful to maintain perspective. The $29 billion in red ink that the finance minister is planning for both 2016-17 and 2017-18 – after that, the deficit is supposed to fall – should be seen against the backdrop of Canada’s $2 trillion economy. At 1.5%  of gross domestic product, the next two years of deficits count as moderate fiscal shortfalls by the standards of most other affluent economies, including the U.S. and the U.K.

Still, the extra $100-billion-plus in debt that the Liberals are on track to accumulate by the end of the decade does give one pause. What if a U.S. recession intercedes or interest rates defy market expectations and rise significantly? Canada’s triple-A credit rating could be in jeopardy if external events do not unfold as the finance minister assumes. A faster return to balanced budgets would reduce Ottawa’s fiscal risks over the medium term.

Budget 2016 signals a stepped-up program of infrastructure investment. In the near term, Ottawa will deploy an additional $12 billion to help advance projects encompassing public transit, water and waste-water systems, “green infrastructure” and social housing. The details on Phase 2 of the government’s 10-year infrastructure plan are to be fleshed out later. Oddly, the budget puts no emphasis on leveraging private-sector capital to assist in building infrastructure.

The budget heralds changes in the structure of benefits for families with children, the employment insurance system, programs touching Aboriginal Peoples and income transfers to seniors. In several cases, new spending obligations are hard-wired into the budget, which will add to the fiscal pressures on Ottawa down the line. The decision to reverse the staged increases in the eligibility age for old age security enacted by the Harper government deviates from the trend across the developed world and seems ill-advised given Canada’s aging demographic profile.

Thankfully, the 2016 budget steered clear of additional tax hikes, including on capital gains income and stock options. The rumour mill had hinted at changes in these areas, but the government demurred. That said, the finance minister pledges to launch a review of existing “tax expenditures” and tax preferences, which could have implications for a wide range of targeted tax benefits now available to individuals and businesses.

There is not much in the budget to excite the business community. In fact, it downplays the role of enterprises and entrepreneurs in driving economic growth, job creation and innovation. This is a puzzling oversight, one that perhaps reflects a state-centric view of how a modern economy operates. 

Jock Finlayson is the Business Council of British Columbia’s executive vice-president and chief policy officer.

As published in Business in Vancouver on March 29, 2016.