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Canada’s 2017 Federal Budget: Anything to Learn?

By: , Posted on: May 15, 2017

As a macroeconomist, it is always intriguing in every spring to see how the government drafts its economic path in the coming year through the federal budget speech. The Minister of Finance, the Honorable William Frances Morneau, has delivered Canada’s federal budget on March 22, 2017. The political reaction was obvious that the Liberals would support the entire content of the budget, while the Conservatives have criticized the ingredients and are suspicious of its goals. In many ways, it is unfortunate that politics has played a higher role in modern day government budgets, while the budget should be economics in nature as it outlines how a government shall foster the economy to its next stage of growth and development.

The theory of fiscal economics shall be simple and straight forward. A budget is meant to be an instrument in ensuring economic stability, growth and balance. Hence, the first economic theory is the “anti-business cycle” strategy of spending to rescue the economy in recession but contracting in times of economic recovery to avoid overheating and inflation. Because economic outcomes are relative in nature, the outcomes and gains are different among individuals. It may not be possible for the government to “make everyone better off without making someone worse off”. Typically, the government spends on educating the young, but education itself creates imbalances as different jobs and professions pay differently. And that leads the welfare advocates complaining about inequality. The political and convenient answer is for the government to redistribute in favor of the “less-endowed”.

It is equally true that in any particular time, there are individuals who need assistance in order to survive economically. There is a difference between assistance and equality. The fiscal policy shall assist those in need, but may not be able to achieve “equality”, which is more of a political ideal than an economic possibility. While provision of social assistance is unavoidable, there is also a broad principle on the examination of different spending items. Typically, there is a division between “demand-side” economics and “supply-side” economics. All welfare assistances are regarded as “demand-side” items as they are merely transfers and no further income and output would be generated. The “supply-side” items can include spending on education, health, housing, research and development, and infrastructure. These are the items that could lead to additional growth and output generation by businesses and individuals. A budget should not simply look at current difficulties but has to ensure future possibilities.

 Some Canadian Economic Features

Given Canada’s large supply of land and a long winter, there are a number of advantages and challenges. One is the development of land-intensive industries. While large scale agriculture can be restricted by the long winter season and forestry can be environment-protecting, manufacturing with different technological levels is most suited in a land-abundant country, as manufacturing can produce high value-added outputs. Indeed, development in the high-technology industries is the right direction in Canada, but there should also be participation from the private sector. Experiences from other countries have shown that a good tripartite relationship between the industries whom conduct investment, the government whom conduct appropriate policies, and the academics whom do the research and development in technology-related industries. Of course, the term “high technology” can imply a wide range of activities. For example, the internet has been used world-wide but it is not developed in Canada, hence would the greater application of internet usage be regarded as “high technology”, or just catching up with other international users. Similarly, more government spending on “high technology” could be worrying if the spending was used simply in raising the wages of key officials.

Canada is basically an immigrant economy, where people from different corners of the world have settled down in Canada over the decades and years. Thus, there are different circles in Canadian population composition. At the micro-level, different ethnic origins can have their private way of life. At the macro-levels, all individuals regardless of their ethnical background would serve the Canadian economy. Traditionally, immigrants are the more enterprising people from their place of origin, and are ready to accept new life in Canada. This should be the case especially in those migrants coming from trouble-prone countries. The Canadian government should apply a selective policy to ensure that new immigrants would be here to contribute to the Canadian economy, and would not be a burden to the tax payers. However, given the diversity in Canada’s different regions, there is also a need to spread out to have a more balanced population in different provinces to avoid over concentration and imbalances, with rising cost of living in some urban centers but under-populated elsewhere.

This leads to connectivity in land transport. Does Canada have sufficient highways to ensure connectivity and avoid congestions especially in prime time traffic? When was the last time Canada builds a highway? In connectivity between urban cities, when was the last time Canada builds a railway? Highways are strongly needed in within-province traffic, but speedy train service provisions are highly needed across provinces. One can ask and make simple comparisons. Japan geographically is a much smaller country than Canada, but efficient train service has facilitated urban development across cities. Indeed, while Canada claims to be a developed country, the Canadian economy has been caught up extensively by other countries in the last three decades. Again, there is designated government expenditure on land transport, but it shall come under the existing operators, and again, how much shall go to the development of new transport structure or simple used to boost the existing management structure?

Among all types of infrastructure development in Canada, land transport should probably be the top priority in government spending. It does not only contribute to connectivity, but it shall spread the economic gains evenly to other provinces and newly developed areas. Supply-side economics can help to expand opportunities, as such spending shall give rise to new and further developments. The federal budget was right in pointing out the importance of opportunity expansion. On the contrary, excessively welfare spending items are transfer that filled up current consumption without generating further opportunities.

 First Reading of the Budget

The theme of the federal budget – Building a Strong Middle Class, is alarming and challenging. When has Canada become a class-sensitive society? It is possible that politically the term “middle class” conveys the advantages provided to the majority, but there is nowhere in the budget that the definition of the middle class is given. In addition, the beginning statements and sections elaborated in the budget did convey a message of greatness and complacency, as Canada is doing so well in various areas. That may be true, but propaganda aside, it would be a more appropriate attitude in a government budget to worry about the problems than to appraise the achievements, if any.

On the “demand-side” of the budget equation, the reading of the budget is that most welfare spending are not geared to the “middle class”. While there was an emphasis on the need to promote education for those economically weak students, the rest is merely geared to spending on welfare. The Liberal government defended the spending and argued that the level of national debt is manageable, but it is rising and there are worrying signs as there are no ways to reduce the debt level. With the exception of mentioning about the small- and medium-sized enterprises and industries and the financial sector, there is surely no mention on the business community at large. What are the incentives for the business sector to grow? Where would be the sources of new employment? Not a single stone is turned in the case of taxation.

The 2017 budget does convey the idea of a “big government” when one examines the large amount of expenditure items. Key spending items included innovation, human capital, transport, research and development and defense. Can the Canadian government foster innovation when it often relates more to individual creativity and private industries than instructions from government? Would the government know the kind of jobs suitable for the newly graduates? The extent of government intervention is becoming paternalistic and has taken up the bulk of activities in developing Canada’s economy rather than giving more chances, choices and opportunities to the private sector.

On the “supply-side”, there is a long list of interventions and assistance in technology development, innovation, human capital and skill enhancement. What the government does at most is to nurture more job opportunities to ensure there will be more professional jobs for the young generation in the years to come. That probably is the answer to “strengthen and grow the middle class”. One thing for sure, even if the government intervention was successful in creating so many professional jobs, it would have to be in the final analysis the expansion of the private economy that would absorb all the newly qualified and educated professionals. Indeed, in some expenditure items, the amount has been budgeted but there was no details in the usage of funds. In land transport, for example, would the government funds be geared to promote new rail technology and railway lines, or just to increase the financial upkeep of existing railway lines? In short, spending in public utilities could be a double-edged sword, as large spending does not necessarily mean innovation and new development. At worst, it could just be siphoned into various short term spending.

 What the Numbers Say?

A usual pattern of a welfare-prone government is to have more spending items and more is spent on each item. The 2017 federal budget does not hide about the growing deficits. In the table on summary statement of transactions, the budgetary balance is deteriorating from -1.0 (billions of dollars) in 2015-2016, rising to -23.0 in 2016-2017, -28.5 in 2017-2018, and -27.4 in 2018-2019, and so on. Federal debt rises from 616 (billions of dollars) in 2015-2016 to the projected amount of 756.9 in 2021-2022. Federal debt has entered a “one-way street.” One would immediately ask where the sources of repayments are. And what guarantee the Liberal government has in containing spending and debt accumulation. Or simply, the Liberal government is not intended to limit the growing spending and debt. Indeed, the answer can be found in the budget that shows that personal income tax shall rise from 144.9 (billions of dollars) in 2015-2016 to 178.6 in 2021-2022, while corporate income tax rises from 41.4 to 50.1 in the same period. The rise of the government power and intervention will be at the expense of the private sector.

In the relevant table on program expenses outlook, it becomes easy to read as all items are on the rise. Some of this is alarming when one looks at the allocation of investing in Canada. The total amount provisioned rises from 700 (millions of dollars) in 2017-2018 to 6,700 in 2021-2022, with a five year total of 20,900. Public transit provision rises from 300 (millions of dollars) in 2017-2018 by six-fold to 1,800 in 2021-2022, with a 5-year total of 5,800. Other provisioned items show similar pace of expansion. Other “investing” items shall begin in 2018-2019. In relation to connectivity, one surprises to see that the item on connecting communities by rail and water shall drop from 300 (millions of dollars) in 2017-2018 to 100 in 2021-2022. Indeed, the item on modernizing transportation will receive an amount of 11 (millions of dollars) in 2017-2018, rising to 17 in 2021-2022. Thus, one would ask while there is large provisions for public transit, the amount that goes to modernizing transportation is meek.

The Liberal government is heading for big spending for sure, and the fiscal situation will only deteriorate, and the numbers do not seem to show any light at the end of the tunnel. With more spending commitments, one cannot project the Canadian GDP to growth too handsomely as both individuals and corporates are facing rising tax. What is worse could be the spill-over effect to individual provinces, and that more spending and greater deficit and debt are justified. Unfortunately, the large spending between the federal and provincial government would be “self-fulfilling”, as one sees the performance of the other.

 Conclusion

Judging from the 2017 budget, one does not feel optimistic about the Canadian economy. The Liberal government is becoming a “big spender” without worrying about the rising deficit and debt. That in many ways is not surprising, as elected governments are always politics-oriented, and economics is simply used as a political instrument. It will be the future elected government, and the future generation, that would have to foot the deficits and debts. The question boils down to the question whether Canadians would become a weaker economy in the future, and that our next generation would face a higher debt cumulated from this generation. In simple words, the over-spending of this generation would mean a tougher economic time for the next generation when they realize that they have to shoulder the debt burden.

In economics jargons, elected political leaders could exhibit the “principle-agent” problem as in many business corporations, where the employed directors are the agent while the shareholders are the principle of the corporation. In the government, leaders are simple political agents, while the tax payers are the principle ultimately. How would one ensure that the agent is acting bona fide for the principle? Or there is a political agenda.

Given that the Canadian economic growth is not performing that strongly in future years, it certainly is not advisable for the government to commit too much spending. On the contrary, it would be proper to generate more business and job opportunities and allow the private sector to have a bigger economic role. The Liberal government really has to realign the economy more in favor of growth rather than intervention.

Dr. Kui-Wai Li is the author of the forthcoming Elsevier book Redefining Capitalism in Global Economic Development that reconsiders capitalism by taking into account the unfolding forces of economic globalization, especially in Asian economies. It explores the economic implications and consequences of recent financial crises, terrorism, ultra-low interest rates that are decades-long, debt-prone countries and countries with large trade surpluses.

The book is scheduled to publish in June. To pre-order your copy, visit the Elsevier Store. Apply discount code STC317 at checkout and receive up to 30% off the list price and free global shipping!

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