Big federal deficit not alarming to Business Council of B.C.’s Finlayson

Economic growth should keep debt-to-GDP ratio steady, rebound in dollar, oil may improve confidence

Critics are worrying too much about the federal government’s large projected budget deficit of nearly $30 billion this year, according to a spokesman for the Business Council of British Columbia.

Executive vice-president Jock Finlayson said aggressive stimulus spending is justified given the “feeble” national economy, particularly in oil- and commodity-producing areas, even if that seems out of step with what’s needed in B.C.

“I don’t find the fact that they’re going to be running a sizable deficit for the next year or two particularly alarming on its own,” he said.

Finlayson noted $30 billion is equivalent to only 1.5 per cent of Canada’s overall economy, measured by its GDP (gross domestic product).

“As long as economic growth is 1.5 or two per cent we’ll actually see the debt-to-GDP ratio remain stable (at around 31 per cent) or even inch down a bit,” he said.

The U.S. and U.K. are running much larger budget deficits as a share of their economies, he added.

Finlayson is less enamoured of the federal projections for continued big deficits stretching out five years, adding he’d like to see Ottawa wrestle them down towards a balanced budget sooner.

Otherwise, he said, the federal Liberals could be surprised by other economic trouble, such as a recession in the U.S. or a faster-than-expected climb in interest rates.

“If those kinds of scenarios unfolded then we could end up stuck with chronic deficits at the federal level rather than shrinking deficits.”

The federal strategy is geared to address the sharp downturn that accompanied the collapse of oil and other commodity markets in other provinces.

That’s translated into not just greatly reduced spending by oil and gas companies, but also pipeline, engineering and environmental services companies that do associated work, along with waves of layoffs and rising unemployment.

“This epic downturn in commodity markets is reverberating through a lot of different industries that are part of the resource supply chain.”

Loonie’s swoon reverses with oil rebound

There has been some recovery since oil prices bottomed in January – it’s now $40 a barrel instead of $26.

The loonie has also rebounded from its low, climbing from under US 69 cents in mid-January to above 77 cents on March 18. It closed Wednesday at 75.7 cents.

Finlayson previously forecast the Canadian dollar would languish between 67 and 75 cents for the rest of the decade.

He now thinks the mid-70s are more likely for the rest of this year if oil holds around $35 to $40, or possibly the lower 70s if oil prices weaken.

The loonie has lifted over the past two months as a result of the rise in oil prices as well as the weakening of the U.S. dollar, in part because markets now expect interest rates there to rise at a slower pace than previously anticipated.

The Canadian dollar is still much lower than it had been in recent years, and Finlayson said that’s good for many exporters.

“If you’re a widget manufacturer, or a farmer or a tourism operator here in B.C., a 75-cent dollar is very manageable from a competitive perspective.”

The fact the loonie has rebounded and stabilized after falling so steeply may also help shore up consumer and business confidence that had been rattled by the dollar’s dive, he said.

An improving economy could help Finance Minister Bill Morneau beat his targets. The budget projections assumed oil would average $25 through 2016, a number that looks pessimistic at the moment.

There’s also a $6 billion contingency built into the federal deficit.

Finlayson said all that suggests 2016’s actual deficit could come in lower, perhaps $20 billion.

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