An Overview of the 2019 Economic and Fiscal Update

By Shiv Ruparell

Yesterday, Minister of Finance Bill Morneau presented the federal government’s fall Economic and Fiscal Update, outlining for the first time since the election how the Liberal’s campaign promises stack up against Canada’s fiscal outlook for the next five years. The 2019 update focused on including the financial relief measures for the middle class promised by the Liberals in October.

However, despite the cost of these promises being incorporated into the Liberal election platform, the fall economic update increased the projected deficit for 2019 to $26.6 billion, $6.8 billion higher than projected in the last federal budget.

For most Canadians, the immediate takeaway from the fall update is deficits are here, and they are here to stay. The Liberals have made a careful calculation that deficits are not the defining issue for their core voters. What matters to Liberal voters is that the net debt-to-GDP ratio remains in check. Deficits have therefore become an entrenched wedge issue between Liberal and Conservative voters, with the Liberals able to employ the “draconian cuts” accusation effectively against Conservatives during election campaigns.

Further, the Liberals have calculated that their voting base will not punish them for deficit spending so long as they realize direct gains from that spending. The government’s spending boost largely stems from two tax relief efforts:

• Expanding the Canada Child Benefit, a means-tested basic income for families delivered through tax deductions; and
• Amending the Income Tax Act to gradually increase the Basic Personal Amount (BPA) to $15,000 by 2023, effectively saving the average taxpayer $300 to $600 a year.

The Deficit

The Government updated its projection for this year’s deficit to $26.6 billion, up 34.3 per cent from the $19.8 billion it projected in its last budget in March. The change is largely due to new spending promises from the recent election. However, next year’s deficit is projected to climb to $28.1 billion, almost $1 billion higher than what the Liberals had previously promised. While a significant portion of the projected deficit for 2020 ($5.6 billion a year once fully implemented) is driven by tax relief through an increase to the BPA, the majority comes from a change in the accounting of public pensions and other future benefits.

Public service pensions have been restated as the government is now pegging their pension liabilities to market rates. In practical terms, this means that if interest rates remain low, the government’s pension liabilities go up. If interest rates increase, the government’s pension liabilities are in turn lowered. This year, due to sustained low interest rates, the pension liability will cost the government $5 billion. Next year, it is projected to cost as much as $7.6 billion. The change in the methodology for pension liabilities would have been an issue for any government’s balance sheet.

True to form, the Conservative opposition has been quick to point out that, with a potential recession looming, bubbling deficits are dangerous for the Canadian economy, especially in a context of loose monetary policy. Even the net debt-to-GDP ratio, a metric traditionally used to evaluate the country’s ability to handle more deficit spending, is rising, albeit for a short period of time and by a small amount.

The government is trying to balance two somewhat competing issues – providing tax relief for families while avoiding any cuts to services. An expensive philosophy in practice, the Liberals have therefore turned to deficits as the solution, without a plan to return to balance in the near future. If the next recession comes sooner rather than later, the government may need to seriously reconsider whether this philosophy is sustainable over the long-term without seriously impacting Canada’s fiscal sustainability and credit rating.

Key Economic Indicators

Overall, and despite sluggish growth in the oil and gas sector, Canada’s economy has performed well over the past several quarters.

• Real GDP growth is on track to average 1.7 per cent in 2019, the second highest rate in the G7 after the United States at 2.4 per cent
• While the unemployment rate reached its highest level since August 2018 (5.9 per cent), the average unemployment rate for 2019 is set to be the lowest yearly rate in over 40 years
• Wage growth has made a substantial recovery, optimistically approaching pre-2008 levels in contrast to stagnating wage growth across the OECD

Non-Financial Policies in the Fall Update

Though the focus of the fall update was primarily the deficit, there were other interesting policy signals from the government in key sectors. They included:

• Continued promises to make major investments in public transit and other urban infrastructure projects through programs like the Investing in Community Infrastructure Program;
• Direct investment or significant tax incentives promoting emission-cutting technology in oil-producing provinces such as Alberta and Saskatchewan. The update made a point of mentioning the importance of the oil and gas sector despite being deliberately omitted in the Throne Speech;
• An increased focus, such as through tax incentives, on diversifying Canada’s export markets, particularly into regions recently unlocked by trade deals such as CETA and the CPTPP; and
• Additional promises to take action to reduce child poverty and incorporate a Gender-based Analysis Plus (GBA+) framework into policy development.

Conclusion

For voters who care about deficit spending, this Economic and Fiscal Update is likely to disappoint, with no clear signs of returning to balance and one of largest projected deficits in recent memory. However, when seen through the lens of political calculation, the Liberals have determined that the country is on sound economic footing and that the costs quite literally outweigh the downside. For those concerned by deficit spending in perpetuity, the hope is that there is room in the budgeting process to cushion a potential looming downturn.