Canadian Federal Budget

April 11, 2016

By: Kunj Patel

The Canadian federal budget was unveiled on March 22nd 2016 with the headline “growing the middle class”. Finance Minister Bill Morneau and the budget emphasize that Canada’s current net debt-to-GDP ratio is the best in the G7 and it is advisable to invest in the economy while interest rates are at historic lows (0.5% currently). The budget plans to run a total $118.6 Billion over the next 6 years but does not exactly specify how or when it will be brought back into balance aside from Bill Morneau stating that the net debt-to-GDP will decrease over time as a result of the investment. The projections that the budget is based on is through information collected from surveying sixteen of Canada’s largest financial institutions and it forecasts low oil prices (up to $63 USD per barrel of WTI crude oil in 2020) and a not so bright economy. Taking into account the rising rates from the current 0.5% to a predicted 2.7% in 2020 the budget predicts real GDP growth on average per year will be about 1.9% over the next 5 years.

Specifically, the budget will provide $120 billion over 10 years for cities and towns across Canada for infrastructure and transportation. $1.87 billion will go towards arts and culture, $2.26 billion for science and research, and $8.4 billion for indigenous peoples over the next 5 year period. Additionally, $444 million will be provided to the CRA to combat tax evasion and it is projected that $2.6 billion will be gained as a result of this funding. There will be increased support for students, veterans, and retirees through easier access to financial aid.

The global outlook is not very good at the moment with signs pointing towards a slowdown in emerging markets such as China, economic stress in established markets such as Europe, and indicators that we are overdue for a recession. At the moment, many countries have hit their limits in terms of quantitative easing and are turning to negative interest rates to boost economies. If Canada can manage to boost the economy through traditional fiscal stimulus instead of turning to an extreme measure such as negative interest rates it would be a positive. In my opinion, even though the budget is titled “growing the middle class” it does not directly provide much benefit to the current middle class despite the small reduction in tax and employment insurance payments. On the other hand, it aims to indirectly boost the future middle class with improved infrastructure and decreased tuition costs. Overall, I like the fact that it is a forward looking budget that looks to invest in technology, innovation, data backed projects, and correct past wrongs however it remains to be seen if the middle class truly benefits from this budget. Nonetheless, it is troublesome that the budget lacks specifics on how the massive deficit will be rebalanced. Also, there is the question of whether or not it is appropriate to waste Canada’s economy stimulating ammunition (the space to spend given our current low debt level) when we are not yet in a recession or times of extreme financial hardship.

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