Finance Minister Bill Morneau will introduce the federal government’s next budget on Feb. 27 as the country faces persistent uncertainty around trade and competitiveness.
Morneau announced the date in the House of Commons Tuesday afternoon. And despite the dark clouds hanging over Canada’s most important trade pact and its corporate tax policy, the minister struck a tone of optimism.
“We’ve seen real improvements over the last couple of years for middle class Canadians, more confidence and among the lowest unemployment rates in the last 40 years, but there’s more work to do,” Morneau told the House.
Still, private-sector experts are expected to press Morneau to keep his fiscal powder dry when they gather later this week for their annual pre-budget meeting.
Morneau is scheduled to sit down Friday in Toronto with leading economists at a roundtable that typically includes about a dozen experts from commercial banks, think tanks and trade associations.
Finance ministers routinely call on outside economists for input and forecasts as part of the budget-writing process. Their projections are averaged to create a fiscal foundation for the budget.
Some economists say that late-2017 improvements in the economy likely will give Morneau more fiscal elbow room in the budget, compared to his October update. Others are less optimistic about the changes in recent months and expect the government to find itself in a similar budgetary position.
But regardless of the fiscal footing, there’s agreement that the government should proceed with caution. Economists want Ottawa to make sure it’s ready for the still-unknown impacts of the drawn-out renegotiation of the North American Free Trade Agreement and the U.S. move to slash corporate taxes.
“Those are definitely the big two — there’s no question about it — and the kind of chill that that could potentially put on the business investment climate in Canada,” said BMO chief economist Doug Porter, whose colleague will attend the Morneau meeting in his place.
“That’s a tough twosome to deal with.”
The seventh round of the North American Free Trade Agreement renegotiation kicks off in Mexico City the same week the budget is tabled.
On Tuesday, Canada’s chief NAFTA negotiator Steve Verheul said the talks between Canadian, American and Mexican negotiating teams have made limited progress to date.
The three NAFTA partners have differing opinions on key aspects of the deal, including the rules for the auto sector, the idea of adding a sunset clause and proposed changes to the investor-state dispute resolution mechanism.
On Monday, U.S. President Donald Trump openly complained about Canada’s trade practices, although it’s not clear what exactly he was talking about.
Speaking to reporters in Ottawa Tuesday, Morneau said Canada’s solid economic situation “puts us in a strong position to negotiate.”
“There will always be days that are challenging.”
Last month, the Bank of Canada highlighted the widening negative impacts of NAFTA’s uncertain future. The bank not only made a point of emphasizing the potential effects on trade, but also the potential damage to business investment caused by uncertainty itself.
Foreign direct investment tumbles
The central bank estimated trade uncertainty would lower investment by two per cent by the end of 2019. It said new foreign direct investment into Canada had tumbled since mid-2016 — a possible consequence of the unknowns around trade.
The bank also warned that lower corporate taxes in the U.S. could encourage firms to redirect some of their business investments south of the border.
Business associations fear the U.S. tax changes could end up inflicting more damage on the Canadian economy than the possible termination of NAFTA.
Morneau’s office has responded to the concerns by arguing that Canada has advantages, such as an educated workforce, and still boasts a competitive tax rate among G7 countries, even after the U.S. reforms. Ottawa is carefully assessing the U.S. tax changes and will take time to fully understand their potential impacts, his office said in a recent statement.
Scotiabank chief economist Jean-Francois Perrault said he doesn’t think the corporate tax changes in the U.S. will have a major impact on Canada — but he admits they could.
Perrault, who will attend Friday’s meeting with Morneau, recommends the government hold off on any big spending plans just in case it needs to respond with tax measures of its own to keep Canada competitive.
Wait and see
“It would be very prudent for the government to wait until we see if, in fact, there is evidence that what’s happening down south in the U.S. is having a detrimental effect on Canadian business,” Perrault said.
Heading into the budget, he thinks the solid economy has given Morneau more fiscal space than he had in the fall.
In October, Morneau’s fall fiscal statement predicted a deficit of $18.4 billion in 2017-18 and a $15.6-billion shortfall in 2018-19.
Perrault, a former assistant deputy minister under Morneau, said he now expects Ottawa to be on track for deficits of $16.8 billion in 2017-18 and $14.8 billion in 2018-19.
Porter doesn’t think there have been major changes in the government’s budgetary outlook since the fall because 2017’s surprising strength was largely due to temporary factors. This year, the economy, while still looking relatively healthy, should be a little bit cooler, he added.
Craig Alexander, chief economist for The Conference Board of Canada, predicts the deficit to be about $4 billion smaller in 2017-18.
Will there be a plan to eliminate the deficit?
“But going forward, they’re not going to have a lot of extra money in the kitty for new initiatives if they want to keep debt-to-GDP ratio on a downward path,” he said.
Following the 2015 election, the Liberal government abandoned pledges to run annual deficits of no more than $10 billion and to balance the books in four years. Instead, it is focused on reducing the net debt-to-GDP ratio — also known as the debt burden — each year.
Alexander would like to see Morneau produce a plan to balance the books, while Perrault is less concerned about it as long as Ottawa keeps lowering the debt-to-GDP.
Porter would also like to see an effort to eliminate the deficit because Canada is entering a late stage in the economic cycle — but it’s not his top priority.
“I’m concerned about our tax competitiveness first and foremost, and that’s actually where I’d like to see the government concentrate efforts.”