The release of the 2017 budget brought little in the way of surprises or major changes. It contained a range of fiscal initiatives aimed at driving economic growth, while appearing to avoid "big bets" which likely reflects the current policy uncertainties, perhaps opting for some flexibility based on what transpires with U.S. growth and trade.
A few key takeaways from the Liberals' latest budget include:
- Ongoing deficits – Persistent sluggish growth and fiscal initiatives are projected to drive the budget deficit up by more than 20% for the 2017 fiscal year. There is no balanced budget objective, but deficits are projected to decline starting in 2018 through 2021. We view the deficit as a byproduct of slow growth, with a more robust pace of expansion needed to put a surplus in sight. That said, federal debt-to-GDP levels, near 31%, remain quite favourable relative to the rest of the developed world. We don't view current government debt as a prohibitive factor for Canada, but an unexpected downturn in growth (recession) would require renewed fiscal restraint (a material decline in government expenditures) to maintain this favourable level. In other words, improving economic growth ahead is imperative to keep debt-to-GDP and annual deficits under control.
- Realistic growth projections – The budget assumes GDP growth of 1.9% this year and 2.0% next year, both fairly consistent with our expectations. We expect the pace of expansion to remain subdued this year, held back by high consumer debt, softer housing trends and restrained business investment. However, we could see better GDP growth than the budget projects for next year, particularly if U.S. growth drives more robust exports and renewed business optimism. Oil prices and investment in the energy and mining industries will play a large role.
- Addressing the labour market – We think investment in skills training and the promotion of a more diversified labour force can be a long-term positive for Canada's economy. This budget appears to target innovation, proposing to invest nearly $1 billion (over five years) into promoting innovation in sectors such as manufacturing, agriculture, technology, clean resources and infrastructure. Nearly $2 billion is proposed to be invested over the next six years to expand Labour Market Development Agreements with provinces and territories in order to improve skills, offer employment counselling and start new businesses. In our view, this won't show up overnight in terms of GDP growth, but investment in more advanced skills training and the budget's intentions to enhance Canada's global competitiveness are on the right track.
- Ongoing commitment to infrastructure – Last year's announcement of $81 billion in infrastructure spending over 11 years was followed this year by the commitment to propose the legislation that will establish the Canadian Infrastructure Bank – the entity that will oversee the planning and funding of the projects. This is related more to the details of the spending, as this proposed infrastructure stimulus was introduced in 2016, but the magnitude of these expenditures will perhaps be the most impactful of the budget proposals. That said, the long-dated nature of this spending, along with details required to execute on these projects, means, in our view, that infrastructure spending will offer a modest boost to GDP over the next decade.
This year's budget didn't unveil any dramatic shifts in the fiscal focus, and instead appears to be focused on introducing more moderate initiatives related to economic areas such as Canada's global competiveness and labour force (skills training, innovation, investment in high-quality child care facilities) and tax collection ($524 million to prevent tax evasion, new excise tax on alcohol). We think the current uncertainties in the U.S. (possible future trade agreements under the Trump administration and the outlook for growth) likely prompted Canadian policymakers to seek additional fiscal flexibility to react to the evolving North American policy environment.
Overall, we don't see the details of this budget as a game changer. We think ongoing modest economic growth and the lack of any new fiscal stimulus puts the onus on the Bank of Canada to maintain its monetary stimulus for a while longer by staying on hold with short-term rates. This, in combination with our outlook for oil prices, will likely keep the Canadian dollar in a range around current levels. We think global political uncertainties will drive higher volatility in the markets over the balance of this year, but ongoing economic growth, a rebound in corporate earnings and still-low interest rates form a solid foundation for the broader bull market to continue looking forward. We remind investors to let your long-term financial goals – not government budgets - be your guide in constructing an appropriate financial strategy and a portfolio that aligns with that strategy.