U of R economist unimpressed with federal government’s spring fiscal update

The federal government unveiled its spring economic update on Tuesday afternoon, reporting a slightly smaller $66.9 billion deficit for the year.

The deficit was $11.4 billion lower than predicted, largely due to a bump in resource revenue from higher prices. The update from Ottawa also included announcements about streamlining the process for applying for the disability tax credit, a focus on attracting more workers to skilled trades and a reduction to the rates paid by workers and employers into the Canada Pension Plan, dropping the base contribution rate from 9.9 per cent to 9.5.

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University of Regina economist Dr. Jason Childs joined The Evan Bray Show on Wednesday morning to share his take on the state of Canada’s federal finances.

Listen to the full interview with Childs, or read the transcript below:

This transcript has been edited for length and clarity.

EVAN BRAY: Give me your executive summary, your thoughts about the economic update yesterday.

JASON CHILDS: I would label this “Damn the torpedoes, full speed ahead!” We’re not seeing a change in direction, and we’ve seen this windfall from largely commodity prices and a feed-through from that to personal income tax revenue and corporate income tax revenue to result in yet more spending. I find it just absolutely wild that a $66 billion deficit is being treated as some marvelous turn of good news. It’s a remarkable deficit for an economy that’s not technically in recession and not facing those current pressures.

The deficit was projected to be much higher. Obviously they put some of that unexpected spike in revenue towards that, but some of it towards spending. Would you have a different assessment if all of the unexpected revenue was put towards the deficit?

CHILDS: Yeah, I would be feeling a little more comfortable, and it would be a much stronger sign of fiscal restraint, and that’s just not what we’re seeing. What we see is the same thing we’ve seen for years and years and years – and at the provincial level as well. Nobody seems to be able to stick to a budget. There’s a budget passed, lots of spending in it, and then after the budget there’s all these new spending announcements made. So it’s hard to take a budget seriously when you know the projections for later years are going to be overridden by new spending announcements.

I had Finance Minister Jim Reiter in from the province who said you’re going to see this across Canada, and we are at varying levels. Are we expecting too much in this day and age when we want a balanced budget?

CHILDS: I don’t think so. It’s still possible to live within within our means. We see revenue going up every year, even in the forecast, so it’s not a revenue problem, it’s a spending problem, and those are choices that we’re making. And in this federal budget and the update, we see ever more government involvement in the economy, and that’s, in my opinion, not a necessity.

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Just yesterday in the update, we heard the government say that the economy is resilient. Does that match what households experience? And is that even a fair conversation?

CHILDS: It’s an important conversation to say the economy is resilient. What that means is we aren’t seeing huge swaths of households lose their income, lose their employment and get obliterated by what’s happening in the economy – we are seeing some. Often you’ll hear economists talk about “K-shaped recovery,” where you have a group of people who end up doing very, very well in Canada – that’s been generally those employed by various levels of government and some other sectors. And you have another group of people that are really struggling and not keeping up with what’s going on – and we’re seeing that in things like food bank use, youth unemployment and other groups that are really struggling. So we’ve got this bifurcation of the economy where it’s working really well for some and it’s not working at all for others, and in a democratic country that’s not going to be sustainable in a meaningful way.

Let’s talk about some of the spending. There are little nuggets in there that have have received applause from all sides of the political spectrum. I think about the what they’re doing for the disability tax credit application process, streamlining that. There are things in here that I think a lot of people are applauding.

CHILDS: (It’s positive) any time you can streamline a government program or an application, or basically just make things simpler. In the end, I would love to see us get really serious about that. On taxes, it’s going to be a good thing. It’s going to improve efficiency. The CPP contribution cut, I’m of two minds there. They’ve made pretty good headway with the funds that they control, so it might be worthwhile getting some of that money back again. We’ve still got the longevity problem where people are living longer than they used to, and so they’re drawing CPP longer, so you’ve got that contribution match-up with entitlements problem coming up.

Prime Minister Mark Carney released the spring economic update on Tuesday. (Lisa Schick/980 CJME)

On the program to train up to 100,000 skilled-trade workers, if we are looking at all of these major national infrastructure projects, I think this feels like a good investment that will have some returns for the country.

CHILDS: That’s the hope. And I’m a big supporter of the trades. I think they’re really, really important and underplayed. And I don’t think it’s harmful for us to divert some of the students that are going to other forms of post-secondary education into the trades. That being said, I’m an economist, and there’s always got to be bad news in here somewhere. I think when you look at wages in that sector, we aren’t seeing those wages rising right now, so we aren’t seeing an indication of a current shortage. If any of these infrastructure projects that we’ve been talking about for years actually come to fruition, is it just going to sustain that employment? And were they just going to have a rollover from one project to the next, or is it going to be an overall increase in demand? Depends on the timing and the scale of these projects and if they actually ever come to pass. So I don’t think it’s a bad idea. I’m not as excited about this as some people

Let’s talk about the sovereign wealth fund for a second. The notion of our country having a fund like this, if we could follow a model like we see in Norway, it makes good sense. I have trouble arguing with it. I don’t feel like we got a lot of details yesterday, and that’s what everyone’s waiting for to understand how this is going to work.

CHILDS: From the details we do have, this is absolutely not a Norway fund. Norway is largely prohibited from investing internally with its fund. Its design is about generating financial return. That’s not what this is at all. This is supposed to be taking ownership stake, whatever that means, in large infrastructure projects, be it mines, be it pipelines, be it whatever. At some level, for me, this feels like an admission of failure, that we’ve created an investment climate in this country where we can’t get the private sector interested in doing things that it would otherwise be doing. So we have to somehow subsidize that, and the quid pro quo subsidy is we get an ownership stake. Remember, a lot of this is tied up with the Special Projects Office, where selected winners get to bypass a whole bunch of regulation. That’s still in place for other projects, so I am not a fan of what was announced as I understand it, but I’m hoping there’s going to be a big change of direction and we get to somewhere that looks a lot more like Norway.

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Jason, does this update give you confidence in Canada’s economic direction, or does it raise more concerns?

CHILDS: My concerns haven’t changed. And I want to throw this number at you, because we talked about the deficit being about $66 billion. But what’s buried in the back of the budget is there’s new borrowing, new debt issuance of $133 billion. So there’s a lot of stuff happening off the balance sheet that is a serious cause for concern.

If we go back to this sovereign wealth fund for a second, that’s another point that a lot of people are not loving: the fact that, basically, the finance minister confirmed yesterday that the $25 billion seed money is borrowed money, but we have a good credit rating, so we’re going to pay low interest.

CHILDS: We’re going to pay low interest, but we’re going to generate low returns. That’s probably going to be the outcome. It looks this thing has a really sketchy structure to me, and I want a lot more detail. What’s the overhead going to be? Who’s going to be running it? What are the selection criteria for the projects? All of those questions I haven’t seen really satisfactory answers to. And it looks an awful lot like the infrastructure bank that was launched before and didn’t succeed. It did not allocate the funds it was supposed to, it did not generate the activity was claimed it would generate. I don’t see anything in the announcements to date that say this is going to be radically different.