The newly-elected federal Liberals revealed their rookie budget to Canadians last week. While most of the media attention was on the size of the $29.4-billion budget deficit, the Grits are also under scrutiny for the size of their $6-billion contingency fund. This fund acts as an emergency fund for the federal government, providing it with a cash cushion if it runs into an economic crisis. But not everyone is thrilled with how much emergency cash they've earmarked. The Conservatives have argued that it's excessively high as it doubles the $3 billion set aside by previous governments, and rivals only Paul Martin's $7-billion fund in 2005. The Liberals argue that it prices in the possibility of an oil price floor of $25 per barrel, while other outside observers say a U.S. downturn could derail the whole economic plan.
Planning for the Worst
The budget targets leave the Liberals with plenty of wiggle room. In a worst-case scenario, should the Canadian economy grow only by 1% and oil were to tumble, the Grits could still meet their budget targets. In a better case scenario, if the Canadian economy grew by 1.4% and oil reached $40 per barrel, the Liberals would have an extra $6-billion to work with; they could further boost spending or focus on repaying debt. “By setting the bar excessively low to start, the Finance Minister now has plenty of room to manoeuvre on the spending front, while still hitting the (inflated) deficit targets published this week,” said Robert Kavcic, senior economist at BMO Capital Markets. “In other words, if the economy performs as expected, Ottawa can spend yet another $4 billion, and still claim that they ‘beat their deficit projection’ by $2 billion.”
An Optimistic Outlook
There may be some good news in store for Trudeau, as new evidence suggests the Canadian economy could be in for a better-than-expected year. Exports are finally starting to pick up due to the low loonie and oil prices. However, this prompts critique on whether that $6-billion fund is really necessary.
A Contentious History
Contingency funds have come under fire in the past for being used for political gain. The Conservatives were criticized in last year’s budget for lowering the $3-billion contingency fund to $1 billion in order to post a $1.4-billion surplus before the election. And the Tories aren’t the only party to use this tactic, as the Ontario Liberals have been used this trick since the 2012 budget. “In a nutshell, part of the contingency reserve and lower-than-expected debt service costs have been recycled back into the spending plan, with some left over for the bottom line,” said Kavcic. “Don’t be surprised if Ottawa takes a similar tack.” That being said, it’s a good idea to leave some margin for error. Being overly optimistic about oil prices could come back to bite the federal government in the backside. Just ask the provincial government in Alberta: due to underestimating the price of oil, Alberta’s deficit will grow from a projected $5.4 billion to nearly double at $10.4 billion. It’s all about striking a balance.
