A Nervous Nation Awaits Bill Morneau’s Federal Budget

By Angus Gillespie

In the midst of seemingly endless pre-budget consultations, Federal Finance Minister Bill Morneau will soon deliver the most anticipated national budget in many years. Canadians are hoping Morneau will be able to provide the financial leadership that will be necessary to trudge through a difficult period as the economy continues to sputter and cough.

Although there were several factors at play, it was the U.S. housing crisis and a number of high-level multibillion dollar sub-prime mortgages that served as the basis for blowing up the global economy in 2008. Now, it’s the ongoing battle between oil giants that is at the core of the problem. Incredibly low crude oil prices have dragged down the value of the Canada dollar to a point that now goes well beyond good fortune for exporters. In mid-January Macquarie Capital Markets Canada Ltd. reported that the dollar could dip below the 60-cent U.S. plateau.

The mantra of the federal government is the promise of investing in middle class families and making sure they have every opportunity to succeed. It means creating jobs by making the right investments in roads, bridges, transit, housing and green infrastructure. And it means asking those who have a lot, to give a little more to those who need it.

Just a month after the Liberals were elected into power, Morneau travelled with Prime Minister Justin Trudeau to last November’s G20 meeting of leaders and finance ministers in Turkey. Morneau found himself in the presence of such company as U.S. President Barack Obama, President Xi of China, Prime Minister Modi of India and Chancellor Merkel of Germany. Traditionally the G20 has been a forum to primarily discuss economic issues facing the world, but the sky was darkened far beyond the financial crises with the horrific attacks that had taken place in Paris just days earlier. Upon returning home, Morneau quickly realized that the biggest challenge facing him would be the economy heading into 2016.

“My objective is two-fold,” Morneau recently told a large audience at an event hosted by the Toronto Region Board of Trade. “First, I want to provide you with a clear and honest assessment of our economic and fiscal situation. Second, and most importantly, I want to give you a sense of our plan to help grow the economy. There is no doubt we are facing considerable headwinds.”

Global growth for 2015 was about 3.1%, marking the weakest results since 2009 when much of the world was still in the midst of a horrible international economic downtown. Although the recent performance of the U.S. economy is encouraging in some regards, the European and Chinese economies remain a huge cause for concern. Although the U.S. remains Canada’s primary trading partner, the country has become more dependent on those other regions as an effort to diversify exports expands. Virtually all of 2015 was a wipeout for the Canadian economy, in large part because of the drastic decline in oil prices.

In the 2015 federal government tabled by former Finance Minister Joe Oliver, the Conservative government thought it was being cautious in projecting oil prices to be at US$54. However, by the end of last year the price had dipped below $40 en route to bottoming out at around US$27 before recently picking up the pace at the end of January to about $33.

Commodity prices remain soft, which impacts terms of trade that is vital for many industries, including the manufacturing sector. Canada has been endowed with such a wide variety of resources that we’ve had to learn how to deal with large swings in their prices. Unfortunately, they are far lower than anyone would hope and the revival is painstakingly slow. Any economy that relies on natural resources will naturally be challenged by large movements in their prices. These shocks are more than just swings in national income; they also force businesses to make decisions about the way resources such as capital and labour are allocated – and that’s precisely the type of decisions governments and the private sector are now facing.

“Going forward, it is very likely that the global economic conditions will remain unfavourable, and subdued commodity prices will persist,” Morneau notes.

Infrastructure Kick-start

Prime Minister Trudeau recently announced that the government was giving serious consideration to bumping up the timelines for a number of infrastructure projects in an effort to kick-start the lagging economy. Prior to that Morneau had promised that the government would not embark on an all-out spending spree but would rather strike a balance between fiscal responsibilities and delivering on commitments made to Canadians during the election campaign.

Morneau says he will ensure the balance by adhering to three fundamental principles. First they will keep the debt-to-GDP ratio on a downward track. Second, they will manage expenditures prudently and last, they will return to a balanced budget by the end of their mandate.

Those promises may not have seemed all that lofty or impressive just 18 months ago. But now, it’s a far different story. Regardless, Morneau has made it clear he has designed a path and he’s confident that sticking to it will yield positive results.

“We are facing two important challenges,” he says. “The first is restoring middle class economic progress – the backbone of our economy. The second challenge we face – and the most important one – is creating the long-term conditions for strong and robust economic growth.

The Liberals have already disclosed they will be introducing a new Canada Child Benefit, aimed at raising hundreds of thousands of children out of poverty.

Despite the pall cast over Canada’s fiscal situation, Morneau seems genuinely optimistic, pointing to the fact the nation’s debt-to-GDP ratio, at roughly 66%, remains well below the G7 average. With interest rates at all-time lows, Morneau believes now is the perfect time to invest in infrastructure projects that equate to billions of dollars for the economy. The new bridge for the St. Lawrence corridor project (NBSLC) is one of the largest infrastructure projects in North America and a prime example of the type of projects needed to boost the faltering economy. The Bank of Canada’s overnight trendsetting rate is currently parked at 0.50% but some analysts believe it’s quite conceivable that governor Stephen Poloz could drop it to 0% before the end of the calendar year.

“Canadian cities have been growing at a rapid rate and all governments have a shared challenge to make investments in infrastructure that create economic advantages for Canada and more sustainable urban areas,” Morneau says. “Over the next decade we have pledged to invest $125 billion in public infrastructure. These investments must grow the economy, get Canadians moving and open up more cost-effective trade options for our exporters.”

According to CIBC, “Canada is in the midst of an infrastructure super-cycle, both for public infrastructure spending as well as energy infrastructure. While public spending might pull back from stimulus-related peaks, private sector spending for public (P3s) and energy infrastructure should remain strong.”

Canadian Manufacturers & Exporters (CME) believes that these investments result in a tremendous opportunity for Canada to strengthen its manufacturing base. The rise of natural resource development projects in mining, oil and gas, and other public and private infrastructure, would create a domestic demand that could benefit Canadian manufacturers in many sectors not previously realized.

Meanwhile the Federation of Canadian Municipalities reported that about 35% of Canada’s municipal infrastructure is at risk of rapid deterioration, including 40% of urban transit infrastructure that needs repair. We’re seeing lots of deterioration and breakdowns with very little resources to pay to fix them.

At the end of January Morneau sat down with leaders from the Assembly of First Nations for what was later termed a productive pre-budget discussion. The indigenous leaders voiced their concerns and made it clear they want to be one of the benefactors when the government doles out the infrastructure money it has been promising. Lifting a 2% cap on funding for reserve programs and services was also tabled.

“Our government respects and values input of the AFN and Canada’s indigenous communities as we work towards the next budget,” Morneau said in a statement to the media.

CIBC World Markets chief economist Avery Shenfeld recently announced CIBC has downgraded its outlook for Canada’s economic expansion in 2016. Shenfeld now believes the GDP will grow by just 1.3% this year, compared with a much rosier forecast of 1.7% just several weeks earlier. At the start of 2016 Canada has the 11th-largest economy in the world. It’s going to be a real battle to retain that spot by year’s end.

“Oil’s further plunge, and a similar malaise across most of the resource space, continues to push back the timetable for reaching a bottom in related capital spending in Canada,” Shenfeld says, who also warned against an “overdose on pessimism.”

Natural Resources Minister Jim Carr acknowledges that with the precipitous decline in the value of crude oil, which has rocked Alberta, underscores the need to quickly move towards the option of moving western oil to tidewater. But even that has its limitations, given China’s economy has slowed considerably over the past year.

Morneau has no shortage of ideas and plans thrown at him from countless corners. Prime Minister Trudeau has essentially given his finance minister complete authority to devise a budget that will best address the onslaught of negative economic news. Job creation will be the short-term goal, likely via infrastructure projects moving forward sooner than planned.

Conservative interim leader Rona Ambrose says it wasn’t the downturn in the economy that led to the surplus being lost. “It was because they (Liberals) spent $3 billion in new spending before the year actually ran out.”

Canada has been sputtering since oil began its downward spiral at the end of 2014, which by extension forced the economy to contract over the first two quarters of 2015. The truth is much of our economic fate is out of our hands, but that hasn’t prevented an economic storm cloud from following Morneau at every stop. The significance of his upcoming budget can’t be overstated. It’s going to be the determining factor as to how well Canada withstands the bumpy road ahead until the global situation begins to improve. When that will be is still anyone’s guess.