Well it is Budget Day in Canada! Today’s federal budget is designed to address Canada’s uncertain economy by running large deficits to stimulate spending. Interestingly enough, the spending is somewhat more skewed towards people rather than things (infrastructure) which probably makes it a long term calculated pre-election strategy.

This is a flawed economic strategy (not necessarily a flawed political strategy) because unlike 2008-09 when GDP actually fell, Canada (aside from Alberta) is not suffering from a deficiency in aggregate demand or consumer spending but from low economic productivity. Indeed, rather than grow the middle class, this budget will ultimately probably grow the future tax burden on the middle class as the federal debt rises to 648.7 billion dollars in 2016-17 and reaches 732.5 billion dollars by 2020-21. Debt service costs will rise from 25.7 to 35.5 billion dollars over the same period. This is a major fiscal shift and it is skewed towards spending on people - "the middle class" - rather than the much touted infrastructure needs of the country. Spending on people is a good thing but one has to wonder how much of this spending will get recycled via the multiplier effect into stimulating the economy. Moreover, I'm not so sure its the "middle class" that is suffering as it is the bottom third of the income distribution.

The deficit will be 29.4 billion dollars in 2016-17, 29 billion dollars in 2017-18, 22.8 billion dollars in 2018-19 and 14.3 billion dollars in 2020-21. Indeed, commitment to fiscal responsibility is eroded in this budget by the repeal of the Federal Balanced Budget Act and the failure to set any plan to balance the budget. Of course, I don't think that balanced budget acts are actually effective but it is the lack of any future target that really surprised me. I suppose the only saving grace is a rather large contingency fund of 6 billion dollars that is built into the projections. This suggests the federal Liberals will actually have a smaller deficit this year than projected - again, a good political strategy.

As for infrastructure spending, well, some thoughts there. While investments in Canada’s human, social and physical infrastructure are needed, they must be done in a targeted manner that emphasizes productive investment or the end result will be wasted spending. Moreover, physical infrastructure spending in particular should be prioritized using evidenced based methods by an independent expert panel that includes accountants, economists, and engineers rather than simply political decisions. There is no assurance that we will be spared any federal infrastructure boondoggles in years to come.

Today’s federal budget is ultimately a page out of the Dalton McGuinty’s fiscal playbook for Ontario in that it aims to grow the Canadian economy by running a large deficit and debt while investing in infrastructure and assorted government programs. To date, this strategy has yet to successfully move Ontario out of its economic malaise and has resulted in Ontario becoming the most indebted province in the country and indeed one of the most indebted sub-national jurisdictions in the world. There is no reason to believe the over 100 billion dollars in federal deficit financing between now and 2021 will have any different outcome.