Federal Finance Minister Bill MorneauFrank Gunn/The Canadian Press
Federal Finance Minister Bill Morneau insists his budget on Wednesday will focus on skills and innovation, but it will really be about that loud man in the White House.
Canada's first budget of the Donald Trump era is an exercise in marking time until the murky clouds around U.S. policy begin to clear.
Will Washington demand a major overhaul of NAFTA? Could it install a border levy that would punish Canadian imports? Might it slash corporate and personal tax rates?
Until Ottawa learns the answers, Mr. Morneau is unlikely to embark on bold, new fiscal adventures. "He can afford to wait because incoming data have been pretty good," David Madani of Capital Economics says.
Retail sales, manufacturing sales and other key gauges of economic health have exceeded expectations in recent weeks as the impact of the great plunge in oil prices during 2014 fades and global growth ticks upward.
Given the brightening picture, Mr. Morneau has scant incentive to rush into major policy changes, such as a much-rumoured move to hike the capital gains tax.
"It would be unusual for him to [raise capital gains taxes], at least in this budget, given all the talk about the U.S. lowering its own tax rates," Mr. Madani argues.
"It would be an even odder move considering the supposed emphasis in the budget on entrepreneurship and innovation. A higher capital gains tax doesn't exactly encourage those activities."
Other observers agree that Ottawa will play a waiting game until Washington's soap opera begins to resolve itself.
Canadian policy makers are likely to "hold back for more clarity south of the border and use the fall update as a second mini-budget," Bank of Montreal economists predict.
They see little reason for Ottawa to make any immediate course changes. The Canadian economy is likely to grow 2.3 per cent this year, according to their calculations, a strong pickup from 1.4 per cent in 2016.
"All told, Ottawa could be working with a bottom line that is roughly $3-billion better than a few months ago," the BMO team estimates.
To be sure, they don't detect much interest among decision makers in using that money to help balance the books. Ottawa may choose to restore its rainy-day contingency fund, but it remains on track to run deficits through 2021, they write.
"The reasoning, at least federally, is that deficits don't matter so long as debt is stable as a share of GDP," according to BMO.
Mr. Morneau has said that this budget will be about innovation and skills development – motherhood issues that no one can criticize, although few can get very excited about them.
The budget could unveil specific moves to encourage investment in areas such as mining and health care that are believed to hold untapped potential, according to Jean-François Perrault and Mary Webb of Bank of Nova Scotia. However, they, too, see limited scope for major new policy announcements.
Instead, all eyes are likely to be fixed on Washington, where rancour and partisanship are the order of the day.
Even attempts to measure the state of current economic activity have split into opposing camps.
The Atlanta Federal Reserve Bank's GDPNow model says U.S. output is crawling ahead at a mere 0.9 per cent annualized pace.
In contrast, the New York Federal Reserve Bank's Nowcast estimates that GDP is booming along at a rapid 2.8 per cent clip.
Which one is right? It's a question that has major implications for Canada's own economic outlook and is one of many things Mr. Morneau would like to know before making any big moves.
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