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Experts question whether costly Liberal plan will give expected economic boost

Finance Minister Bill Morneau receives applause as he tables the federal budget in the House of Commons in Ottawa on Tuesday, March 22, 2016.
Image Credit: THE CANADIAN PRESS/Adrian Wyld
March 22, 2016 - 2:30 PM

OTTAWA - The Liberal government is planning to pile on more than $100 billion in public debt over the coming years as part of an ambitious strategy to revive economic growth over the long haul.

The Liberals tabled a maiden budget Tuesday that predicts big spending on investments like infrastructure will boost the country's real gross domestic product by 0.5 per cent this year and one per cent in 2017-18.

To help get it there, the government will break election promises that vowed to run deficits under $10 billion before balancing the public books in four years.

Now, even five years looks like a stretch.

The budget has opened spending floodgates that will lead the country to projected shortfalls of $29.4 billion this year, $29 billion in 2017-18, $22.8 billion in 2018-19, $17.7 billion in 2019-20 and $14.3 billion in 2020-21.

Finance Minister Bill Morneau tried to offer reassuring words that the deficit is part of the plan to give Canada "a growth rate that's going to put us in a continually strong fiscal position."

If that higher growth kicks in a little early, Morneau said it's even possible the books could be balanced in five years.

"We're going to get ourselves to a balanced budget — it'll take a few years, but we'll get there through strong investments," Morneau told a news conference before tabling the budget in the House of Commons.

Experts, however, were skeptical that Ottawa's plan to stimulate the economy will have the government's desired effect.

"It looks like a bit of a stretch," said Jean-Francois Perrault, Scotiabank's chief economist and a former senior Finance Department official under Morneau.

Perrault, who was deputy minister of economic and fiscal policy until the end of 2015, credited the government's decision to focus some of its new investments on revamping child benefits — and put more cash in the pockets of lower-income earners.

That demographic is more likely to spend the money, he said.

But Perrault also noted that some people might be led to believe the government doesn't have a commitment to eliminate the deficit, since the five-year outlook ends with a projected $14.3-billion deficit.

As expected, the government numbers include a hefty contingency cushion of $6 billion, which could ultimately help the Liberals beat expectations.

Craig Alexander of the C.D. Howe Institute think tank, said he believes the government investments in areas like infrastructure will help the economy — but probably not as much as Ottawa expects.

He expects the investments to only boost real GDP growth over the next two years by about 0.2 or 0.3 per cent.

"The real problem is the fact that the government doesn't have the money to pay for all the new initiatives, so they're actually projecting a significant deficit and a deficit that's going to persist through their entire term in office," said Alexander, who noted the Liberal plan will raise the public debt by more than $110 billion between 2015-16 and 2020-21.

"The cautionary note is the fact that once you're running deficits it's very easy for them to run larger than you anticipate."

The budget confirmed that government is on track to break their three major fiscal targets that helped them win the October election.

During the election campaign, the Liberals vowed to balance the books by 2019-20 and to lower the country's net debt-to-GDP ratio in each year of their mandate to 27 per cent. The ratio, also known as the debt burden, represents a government's capacity to pay back debt.

On Tuesday, Morneau said the government would only lower the ratio over the course of the mandate.

Prime Minister Justin Trudeau pledged to respect a $10-billion upper limit for annual deficits unless the economic situation got "radically worse."

The economy dipped in the first few months that followed the election, but recent data suggest overall conditions have improved since the start of 2016.

The Liberals' Conservative opponents have repeatedly criticized the government for planning to drive Canadians deeper into debt, even though

The budget plan also includes specific fiscal measures to help some of the regions that have suffered the biggest blows from the commodity-price slump.

Through the seldom-used fiscal stabilization program, the federal government says it will provide $31.7 million in financial relief to oil-producing Newfoundland and Labrador.

Ottawa will also provide a fiscal stabilization payment of $251.4 million to Alberta.

The program is designed to compensate provinces that suffer steep drops in revenues from one year to the next.

News from © The Canadian Press, 2016
The Canadian Press

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