{"id":264512,"date":"2016-11-04T10:30:56","date_gmt":"2016-11-04T14:30:56","guid":{"rendered":"https:\/\/policyoptions.irpp.org\/issues\/the-blanks-in-the-fall-economic-statement\/"},"modified":"2025-10-07T21:20:40","modified_gmt":"2025-10-08T01:20:40","slug":"the-blanks-in-the-fall-economic-statement","status":"publish","type":"issues","link":"https:\/\/policyoptions.irpp.org\/fr\/2016\/11\/the-blanks-in-the-fall-economic-statement\/","title":{"rendered":"The blanks in the Fall Economic Statement"},"content":{"rendered":"

Government policies influence the size of the economic pie and how it\u2019s divided.<\/p>\n

In its first year, the Liberal government sought to divide the pie more equally, by targeting policies more to middleand lower-income Canadians. For instance, it directed transfers to families with children, seniors, and students to the lower part of the income distribution; made personal income tax rates more progressive; and expanded the reach of the Canada Pension Plan.<\/p>\n

Now as the government begins its second year in office, its efforts have shifted to growing the pie over the long term. Last week, after a contentious debate in Europe, the government finally signed a major trade deal with the European Union. Shortly thereafter, in its fall economic statement (FES), the government announced the creation of two new agencies: one to fund infrastructure projects and one to attract foreign investment, and it announced measures to expedite high-skill immigration to Canada.<\/p>\n

These moves follow the playbook developed by Dominic Barton (managing director of McKinsey) and the Advisory Council on Economic Growth<\/a>. The government is sending clear signals that Canada is open for business and wants to actively engage with the rest of the world. At a time when many countries are turning inward, this sentiment is admirable. Moreover, given their key role in raising our long-term growth prospects, seeking new ways to boost Canada\u2019s trade and business investment performance is what they should be focused on. Will this plan actually do that? It\u2019s still too early to tell. Here\u2019s a look at a few things that we\u2019ve learned from the FES and some questions that it raises.<\/p>\n

Weaker economic and fiscal outlook <\/strong><\/p>\n

Over the next five years, Canada\u2019s nominal GDP growth is now expected to average only 3.5 percent annually, down from the 3.9 percent anticipated in Budget 2016. With this slower growth outlook, the government expects to collect less revenue. Program spending will also increase, though this fiscal pressure is effectively offset by savings on public debt charges, which are due to lower interest rates (figure 1).<\/p>\n

\"po_fig1\"<\/a><\/p>\n

The end result of these recent adjustments is that, once again, Ottawa expects larger deficits. This continues the fiscal deterioration that\u2019s occurred over the past 18 months (figure 2).<\/p>\n

\"po_fig2\"<\/a><\/p>\n

Interestingly, the largest increases in program spending over the five-year projection are scheduled to begin only after the next election, expected in 2019 \u2014 and they\u2019re not due to infrastructure, but rather to CPP enhancement, and the eventual indexation of the Canada Child Benefit to inflation starting in 2020.<\/p>\n

In fact, despite the large numbers highlighted in the FES on infrastructure spending ($81 billion over 11 years), Ottawa’s fiscal hit over the next five years from infrastructure is essentially negligible, since much of this \u201cnew\u201d infrastructure money seems to have already been accounted for in the fiscal framework (see figure 3). It appears that this big announcement effectively draws from funds previously earmarked for phase 2 of the infrastructure plan that was announced in Budget 2016.<\/p>\n

\"po_fig3\"<\/a><\/p>\n

Looking beyond the typical five-year budgeting horizon we can see the extent to which this newly announced infrastructure spending is back-end loaded (figure 4, from the FES). As such, the FES is really committing not this government but the next one to continued increases in infrastructure spending.<\/p>\n

\"po_fig4\"<\/a><\/p>\n

Creation of an infrastructure bank <\/strong><\/p>\n

The \u201cinnovative financing\u201d part touted in the government\u2019s infrastructure plan is the creation of the Canada infrastructure bank (CIB). The basic rationale for the CIB can be found in the Advisory Council on Economic Growth brief<\/a> that says Canada has a large infrastructure gap \u2014 we\u2019re currently not spending enough on productive infrastructure that could improve our long-run growth. Public infrastructure in Canada is largely owned by cash-strapped provincial and municipal governments, which lack the means to significantly scale up their investments in big projects of national importance.<\/p>\n

At the same time, long-term institutional investors (such as pension funds, banks and insurance companies) have lots of money they need to invest somewhere. In this low-interest-rate environment, these investors would be keen to work with government to invest in long-term capital projects, including building or maintaining highways, bridges, rail, ports, airports, broadband capacity or power transmission. But they are holding off, we\u2019re told, because they need:<\/p>\n