Kevin Libin: To Justin Trudeau, the economic data always say ‘spend’

Posted by: privatefinancetips in BLOG, Mortgage Loans Mar 27, 2016

They still won’t be dissuaded from planning spending – possibly much more of it than ever

On Thursday came another illustration of the Liberal government’s refreshing new “evidence-based” policy, where the fiscal evidence somehow always backs new spending policies. Just a day after Statistics Canada released moderately encouraging data on Canada’s fourth-quarter economic performance, Prime Minister Justin Trudeau was telling Bloomberg the case has not been stronger for digging deeper into debt.

Trudeau sat down with reporter Josh Wingrove to share a few of the fiscal wisdom he’s gained in his 4 months on the job. “My message with other government leaders is don’t fall into the trap that thinking that balancing the books” is an result in itself, he said. “It’s a way to an end.” Obviously, there are not many governments anywhere close to falling into that trap, including Trudeau’s. One of the G7, only Germany has been reckless enough to be seduced by the ol’ balanced-budget con, although somehow its economic growth still managed to outpace Canada’s for 2015.

The Liberals wish to dress Canada’s troubles in Keynesian clothes to justify Keynesian remedies

And yet, Canada’s economic performance last year offers much more bright spots than what we’d been primed to think from all the talk from Ottawa from the need for increasing levels of stimulus. Finance Minister Bill Morneau’s February fiscal update downgraded projected federal revenue estimates most steeply within the just-finished final quarter of 2015 and the current first quarter of 2016. But as Gluskin Sheff’s chief economist David Rosenberg points out, a lot of the contraction expected in 2015 never materialized; both consumer spending and residential construction, together comprising two-thirds of the Canadian economy, stayed positive through all four quarters this past year, with business investment proving the weak spot – which had almost everything to do with pullbacks in capital-intensive resource projects. Meanwhile, industry had been showing growth in November and December, even before the boosts coming our way from your heavily discounted dollar really display in the numbers. Which will possess a much bigger effect on the following few quarters’ performance than any planned deficit spending the Liberals are planning.

Still, they will not be dissuaded from planning it – possibly more of it than ever before, as Wingrove reported that Trudeau “hinted he is considering expanding” further around the already ballooning deficit projections. Obviously the plodding pace of this federal “investment,” that is still to become announced in the budget in late March will, even if fast-tracked, be lucky to make it out the door through the last quarter of 2016. Already, Rosenberg’s economists forecast two percent or even more annualized growth this season, which some might call the ceiling for an economy with productivity stuck at one percent, and less than a single percent population growth.

But to Trudeau, the only real possible reading from the data is that the leash on spending should be further loosened. According to the Bloomberg story, he apparently even holds up the fact that his government is now counting on an $18.4 billion deficit – well above the $10 billion maximum the Liberals promised within the election, and before any new expenses are accounted for -as yet more reason to invest. Here’s Wingrove quoting Trudeau: “‘It’s to me a lot more of grounds why we need to be investing intelligently in infrastructure, in profit the pockets from the middle class, to develop the economy,’ Trudeau said of the fiscal situation he inherited after his majority win in the Oct. 19 election.”

The mounting evidence, however, is that neither spending on infrastructure nor money in middle-class pockets may have much effect on boosting growth. The Liberals want to dress Canada’s troubles in Keynesian clothes to justify Keynesian remedies, as if we’d a lot of underutilized labour capacity that requires only to be placed to operate digging ditches and building bridges, when it is almost entirely associated with uncontrollable global commodity shocks. Meanwhile, Statistics Canada’s latest figures show that, while Canadians had a 3.9 percent boost to household incomes this past year, nearly a full point a lot more than in the previous year, we’ve no mind to splurge by using it: Household spending increased in a significantly slower rate in 2015, as the rate of savings increased. Using what middle-class transfer perform the Liberals expect they are able to change that behaviour?

Even the fact that the Bank of Canada – unlike other central banks – still sits on considerable ammunition, should it have to juice growth, will not deter Trudeau’s government from its resolve to break america of their practice of preferring balanced budgets. The only real evidence that seems to matter to him is the fact that our debt is not as bad as our G7 peers, which “leaves us with increased flexibility,” Trudeau said.

“If we were sitting at 90 per cent debt to GDP, we probably would not be contemplating the kinds of things we all know we will do,” he continued. The trouble is, Canada’s gross financial government liability is more than 90 per cent, once you account for provincial and municipal debt (everything ultimately considered federally backed), and is not remote from those of the U.S. or U.K. It is, at roughly 95 percent of GDP, higher than at any point other than the late ’90s, and right about where France’s was at 2008. France likely believed that manageable, then, too – until it had been walloped by an unforeseen global financial crisis. But something like that could never happen again. In the end, Trudeau assured Wingrove, he’s carefully “balancing that fiscal responsibility that Liberals have always had with an knowning that to be able to grow we have to invest.” Of course, some people, including the top minister, might be too young to understand that Liberals have also at times caused spending and deficits to operate dangerously amok. Maybe this what it really looked like just before they did.