Ottawa has room to add another $15 billion to stimulus spending, says economist

The Liberal government could have more room to manoeuvre on stimulus spending with no damage its fiscal health, say economists.

Prime Minister Justin Trudeau and his government are set to unveil their budget within the coming months. Originally, Trudeau’s election platform made room for at least $5 billion a year in new infrastructure spending to assist pump necessary stimulus into Canada’s struggling economy. 

But Bank of the usa Merrill Lynch economist Emanuella Enenajor states that, based on her calculations, the federal government could spend as much as an additional $15 billion annually but still meet its goal of decreasing the debt-to-GDP ratio.

“However, there are still many unknowns using the timing and content of the Federal budget, we reason that Ottawa has room to spend more than initially announced, assisting to ease the pain of the oil shock,” she said.

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Recent reports indicate that Trudeau is already looking at fast-tracking stimulus to provinces that have been hard hit by the rapid decline of oil prices, including Alberta and Saskatchewan.

Enenajor’s calculations take into account a predicted $1.6 billion budget shortfall stemming from the new tax measures the federal government is undertaking. The Parliamentary Budget Officer calculated the measures, set to boost the tax rate on incomes over $200,000 and work for middle income earners, will drive up the deficit.

The extra wiggle room would certainly be considered a boon to a government that faces pressure to resuscitate a struggling Canadian economy. The Bank of Canada said last month that it was holding its benchmark rate of interest unchanged because it awaits news of how much stimulus is going to be allocated within the upcoming federal budget. 

Finance Minister Bill Morneau last November adopted debt-to-GDP as a key “fiscal anchor,” saying he will work on keeping the ratio on the downward trajectory. Even if debt grows in this scenario, so long as the economy grows faster, the ratio could be lowered.



The Liberals had originally pledged they would return to a balanced budget by the end of their mandate, before changing their focus to reduce the debt-to-GDP. Deficit expenses are expected to stack up, with economists at National Bank of Canada saying a week ago that the government could face the prospect of $50 billion in deficits in just 2 yrs.

“Indeed, the government stimulus promised by the Liberals around the campaign trail might take the government budget shortfall to roughly $25 billion a year, or a bit above one per cent of GDP,” said economists Krishen Rangasamy and Warren Lovely in note.

They went on to note, however, that Ottawa is within a powerful enough fiscal position that could afford to run a couple many years of deficits as large as $30- to 35-billion without “eroding its long-term fiscal sustainability.”

Enenajor said the federal government should use any extra stimulus paying for the best measures. She questions the effects of the focus on tax cuts in the present budget, noting that historically, infrastructure is a stronger section of returns for governments.

“Most studies around the impact of public spending highlight infrastructure as getting the best bang-for-buck,” she noted. “Economists refer to this bang-for-buck because the ‘fiscal multiplier’: the dollar effect on GDP associated with a dollar of presidency spending.”

Infrastructure spending, however, may not necessarily come with an immediate impact. Studies have shown paying for projects already underway has little additional economic impact and new projects won’t necessarily be shovel ready, meaning that economic growth will lag spending.

Paul Beaudry, professor at the Vancouver School of Economics at the University of Bc, said the government should be careful not to rush spending and ensure it’s targeted.

“The essential issue is not really a insufficient spending, if that was, that’s when you rush shovel-ready projects to get people moving again,” he explained.

Instead, the real problem is depressed resource prices, that could be low for quite some time before they rebound. Beaudry said that means that any stimulus spending must be focused on retooling the Canadian economy from that sector to adjust to the change. Stimulus is going hand-in-hand with other initiatives for example retraining workers, he added.

“We must structurally adapt to this transformation that could be quite persistent,” he explained. “When we have big sectoral shocks like this, we should be thinking about spending to assist the economy adjust this, not merely obtaining the money flowing as quickly as we can.”

jshmuel@nationalpost.com

Twitter.com/jshmuel