Next week, Canada’s federal government will be announcing their first budget since Justin Trudeau’s Liberals came to power, and the deficit is expected to be larger than the $10-billion deficit promised in the recent election campaign.

Professor James Brander of the UBC Sauder School of Business says he doesn’t blame the government for a larger deficit, but warns against keeping it going in subsequent budgets.

Brander JamesIs a larger-than-projected $18.4-billion deficit justified?

Given that economic growth prospects have declined since Trudeau was elected, not just for Canada but also for the rest of the world, a bigger deficit is certainly to be expected. Revenues won’t be as high as projected, and if expenditures stay the same, the deficit naturally goes up. Plus, extra expenditures such as employment insurance payouts will kick in as a reaction to a weak economy – those are known as automatic stabilizers as they don’t need new legislation when times are tough. And that’s fine, the government can let that happen. I think the reported estimates of a $15-20 billion deficit sound reasonable.

Should government up spending even when the financial picture for the country is in decline?

They’ve remained committed to spending more on infrastructure, and right now that’s a good idea as it’s an investment in future growth. Canada’s infrastructure needs improvement, and infrastructure spending is a good investment that usually generates more economic benefits than it costs if the projects are well-chosen. So a little extra spending by the government today will pay off down the road for people and businesses.

Should government spending be increased even more?

Other than the spending planned for infrastructure and for automatic stabilizers, no. Some would advocate more discretionary spending to stimulate consumer spending and kick-start the economy, but Canada isn’t really big enough to carry out such a plan by itself, and conditions aren’t bad enough to justify major additional stimulus spending in any case. And it would be a mistake to entrench deficit spending, as it can be very difficult to get out of that. The deficit should only be temporary.

Does this budget deficit mark the end of Trudeau’s “sunny ways?”

I don’t think so, but it will probably be the first significant hit to the “sunny” aura that surrounds him. He’s still in a honeymoon period, as popular opinion and media coverage are still very positive, but sooner or later the bloom’s bound to come off the rose. I don’t think the honeymoon is completely over yet, but reality is starting to set in as the bills start to come due.

Top image source: World Bank Photo Collection on Flickr.