Trudeau Will Push Canada Into the Red With `Unsexy' Debut Budget

Prime Minister Justin Trudeau will put the Canadian government back in business when he introduces a debut budget Tuesday that reverses a decade of restraint.

Trudeau, whose popularity has swelled since his majority victory in October’s election, will push the country deeper into deficit as it grapples with sluggish economic growth. The shortfall will finance new benefits for families and what the Liberal prime minister bills as “unsexy” infrastructure spending, among other programs.

The deficit is expected to be in the range of C$30 billion ($22.9 billion), up from C$2.3 billion in the fiscal year that ends March 31. That amount of red ink will test three decades of fiscal restraint in Canada and underscore the contrast between Trudeau and his predecessors. Stephen Harper, the Conservative who governed from 2006 to 2015, aggressively pursued a balanced budget in recent years while cutting taxes and shrinking the role of government.

“We will continue to put more money in the pockets of hard-working families,” Trudeau said in a brief pre-budget statement Monday. “Because we know that when middle-class Canadians have more money to save, invest and grow the economy, all of Canada benefits.”

Central Bank

Trudeau’s move comes amid calls to do more with fiscal policy and take pressure off the Bank of Canada. Governor Stephen Poloz has said policy makers are waiting to assess the impact of budget measures before making a decision on interest rates, which have been on hold at 0.5 percent after two cuts last year to counter the oil-price shock. The prime minister said this month governments need to do more as monetary policy loses its bite and economists are encouraging him to be bold.

“I think he should strike while the iron’s hot and go big on the spending side,” Gluskin Sheff & Associates Inc. Chief Economist David Rosenberg said by e-mail Monday. On growth, Rosenberg -- who has called for C$50 billion in stimulus -- said he hopes the Liberals are “committed to growing the pie, not just changing the size of the slices.”

Trudeau said in a March 17 interview at Bloomberg’s headquarters in New York that Canada doesn’t need large-scale stimulus. Instead the prime minister said the budget, which will be delivered by Finance Minister Bill Morneau around 4 p.m. in Ottawa, will focus on supporting the middle class and fostering long-term economic growth.

“A balanced budget remains our fiscal objective,” Liberal lawmaker Steven MacKinnon, who sits on the parliamentary finance committee, said in an interview Monday. “It’s important, while respecting our spending commitments, to have a credible plan to get back to zero.”

Election Platform

The budget will largely reflect Trudeau’s platform from last year’s election campaign, when he vaulted from third to first as the only leader promising deficits. However low crude prices and slumping business investment have forced changes, with the Liberals casting aside their pledges of a C$10 billion deficit cap, a declining debt-to-GDP ratio and a return to balance by 2019. A fiscal update last month forecast growth of 1.4 percent in 2016, down from a 2 percent estimate made just three months earlier.

Trudeau hinted this month that Morneau will detail an increase in taxes on stock options, a move that prompted push-back from Canada’s technology and Startup sector. The prime minister also advocated changing Canada’s small business rules to deter high-income earners from using them to lower their tax bill. The Liberal government has already lowered taxes on middle-income earners by 1.5 percentage points, while raising them on those earning C$200,000 and above.

Tuesday’s budget will also fill in measures that have been sketched out only roughly so far. Trudeau’s platform called for unspecified reversals of government policy and “tax expenditures,” from which he hopes to recoup C$6.5 billion over the next four years. Morneau has ruled out a sales-tax increase but he and his officials have stayed quiet on what other levies they may be considering.

Infrastructure Plan

Trudeau campaigned on C$60 billion in new infrastructure funding over the next decade, though only C$5 billion is due in the fiscal year that begins April 1. The budget isn’t expected to detail particular projects, but rather an envelope of funding that will be rolled out over time. This will come as a disappointment to city mayors who have called on the federal government to get money out the door in time for the 2016 construction season.

“We’re going to do the unsexy things that governments hate to announce,” Trudeau said last week. “You know maintenance, upgrades -- the things that you don’t get to cut a ribbon and announce a shiny new building on.”

Instead, spending will be aimed at social measures including the cornerstone Canada Child Benefit. The program will cost an estimated C$22 billion annually -- a projected C$2 billion in new money, along with other funding redirected from canceled programs -- and would substantially increase direct, non-taxable Payments to low-income households with children. Trudeau also said Monday the budget would contain “historic” investments targeted at Canada’s indigenous people.

For MacKinnon, the child benefit is key. “It’s the most important spending commitment -- perhaps the most important social realignment of federal spending -- that we’ve had in a long, long time,” he said.

--With assistance from Erik Hertzberg To contact the reporter on this story: Josh Wingrove in Ottawa at jwingrove4@bloomberg.net. To contact the editors responsible for this story: Theophilos Argitis at targitis@bloomberg.net, Stephen Wicary, David Scanlan

By: Josh Wingrove

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