By: Aniket Bhushan
Published March 27, 2017
This article was originally published on OpenCanada
The 2017 federal budget has come and gone. As a follow-up to my pre-budget analysis, which warned that numbers can inflate commitments, here is a view of the budget put forward on Wednesday in Ottawa, using a simple framework — the good, the bad, and the opportunities. I’ll start with the big picture and then turn to the international dimension.
The Big Picture
This was supposed to be the big innovation budget, but things didn’t pan out nearly as planned. It flirts with innovation, but certainly isn’t big. The total net fiscal cost of the budget comes in at under half a billion in three of the five years projected. Growth expectations, compared to as recently as November’s update, have been revised even less in this budget. There is no effort to balance the budget. And the fiscal anchor — federal debt/GDP — is static.
In the lead up to this budget, two outcomes that the Liberals likely didn’t even put a black swan probability on (certainly not a joint probability) happened. You may have heard of them: Brexit and Trump.
There are two risks if the current budget is a reaction to these events. First, it increasingly looks like the government is backtracking on its initial big promises in the face of global uncertainty. This may work politically, sufficiently distant from an election. But it is hardly an economic strategy. The government concluded this is not the right time to go big in any direction. The risk is that it makes them look directionless.
Second, coming in too loud when trumpeting impending “transformational” and “historic” investments (to paraphrase last year’s budget and the fall update) and then delivering too slowly (just like past governments) by taking the foot off the gas might just be too easy to see through. Voters will look for a return on their investment for all that deficit spending, in the form of growth. The government’s ever gloomier outlook, which sets expectations lower and easier to beat, is totally at odds with showing what deficit spending is buying in terms of growth.
The good news is that it could be worse. Canada remains a relatively safe, solid and reliable bet, and one not upended by populist lore (at least not yet).
On the international front
The story is similar. Notably, the chapter on “Upholding Canada’s place in the World” comes with a minimal additional net fiscal cost – over the next 3 years a mere $100million.
There is no addition to the international assistance envelope (IAE) and the announced measures (see below, on the development finance institution) entail no new additional fiscal cost.
The good news comes in the form of themes that attempt to connect the international to the domestic (and vica versa). Three areas stand out from the perspective of potential linkages and a changing role for Canada in global development (two are under the rubric of innovation “superclusters”):
- A desire, backed by dollars, to position Canada as a leader in clean technology.
- Positioning Canada as an agricultural and ag-tech leader and linking the agenda with climate change and responsible resource governance (land and water).
- An attempt at a nuanced gender-differentiated approach — the first ever gender-based analysis (GBA) to appear in a budget document.
Commitments on clean tech are backed up with cash to build Canadian domestic capacity, but ultimately so that these investments bear fruit in terms of global competitiveness and diversification of Canada’s global footprint.
Agriculture and ag-tech were highlighted and recommended as strategic areas by the Finance Minister’s Advisory Council on Economic Growth (chaired by Dominique Barton). Considering Canadian exports in these sectors are what is driving Canada’s positive balance of trade position with strategically important emerging economies – India and Indonesia to name two – this also makes imminent sense as an area of further focus and investment.
A gender differentiated approach is perhaps little more than a prerequisite for a self-proclaimed “Feminist” prime minister. Though interestingly the word feminist or feminism does not show up once in the budget. Purists can and likely will easily critique the GBA chapter. But from an international perspective it provides a tangible link between domestic and international (women and girls) priorities, which are also reflected in the restatement of the $650 million investment in sexual and reproductive health and rights (SRHR) programs, which was earlier this year made on International Women’s Day (and also entirely predicted).
Each has a potential fit with a new global development strategy and approach for Canada. These aren’t just areas ripe for domestic innovation; they are also areas of key global needs and opportunity, especially in emerging, developing and frontier economies.
However, the gap is that these linkages, their intellectual underpinnings, and theories of change are hardly flushed out.
Looking at the budget from a “Canada in the world” and development perspective, ‘the good’ is a relative concept. But things could have been worse. Here are the budget’s optimistic elements:
- It included implementing the development finance institution. As predicted, the budget delivered on the development finance institution (DFI). But not, as hoped, larger than the $300 million (from Budget 2015), or much clearer on details. Though we know it will have an independent board which will be tasked with ensuring development additionality, it would have been better to see the DFI take shape more like the Canada Infrastructure Bank, both in terms of the range of instruments and leverage. There is certainly potential for shared learning across the two.
- No change at all in the international assistance envelope implies continuation of increases from Budget 2016 but nothing further (also as predicted). Our analysis shows the increase, modest though it is, is running faster than the department predicted or Budget 2016 planned for. But it could be worse: witness the proposed U.S. cuts to the State Department which could be over 30 percent and severely affect the contribution of the world’s biggest donor. Witness the backlash in the UK to its 0.7 percent commitment.
- It included an Asia strategy. The strategy is anchored around a five-year $256 million commitment to, belatedly, join the Asian Infrastructure Investment Bank (AIIB). It also reflected a desire to ink free trade with strategic Asian partners including China, Japan and India. There is certainly potential, as we have shown, Japan and India at the moment represent less than 2.5% and less than 1% (respectively) of Canada’s total trade. But doing deals will not be easy – as Canada has surely learnt from over 7 years of negotiations with India, and China’s demands (further opening up of resource sector ownership) for any reciprocity.
- There is an intention to join the international Arms Trade Treaty (ATT). This included a five-year $13 million implementation commitment – something advocates have been calling for.
- It expanded efforts on peacekeeping support. However, it was light on specifics and new commitments.
- There was consolidation of certain rules of origin around countries receiving preferential market access – i.e. trade as a route out of poverty. Small moves, but potentially impactful for Haiti and its apparel exports to Canada, which could be a bigger growth engine.
- There was no mention of the international assistance envelope levels at all – and so, the transparency gaps persist. The core budget tool that funds foreign aid is not being added to. And there is no clarity on its current base and projected change over time (even to meet Budget 2016 commitments). This is a serious problem.
- Canada’s image, with upcoming G7 and NATO summits, on development spending is not good. Canada would not want to look like a laggard as it plays host to the G7 next year. And on NATO, the outcomes of the defence review will allay some concern with increase in expenditure, but will tip the balance between defence and development further in favour of the former — at a time when arguably there is more opportunity and need for Canada to lead with the latter.
- The International Assistance Review (IAR) took a backseat, at least compared to the Defence Policy Review. Noteworthy that the IAR barely gets mention, while the defence review yields a clear, costed framework (and gets a box in the budget). This speaks to the relative seriousness of the two review processes and the stakeholders involved.
The Opportunities, from a development-sector perspective:
- Delivering a new policy and funding framework for international assistance – last years’ budget (2016) announced the IAR and consultations, the outcome of which was supposed to inform budget 2017. Clearly things did not pan out as planned as again the outcomes are delayed. Expectations of the IAR are effectively raised. The budget vaguely punts decisions to the forthcoming IAR in several places.
- Development stakeholders should push for the new framework to include (a) a costed plan, that provides a sense of where Canada will invest and how much; and (b) address transparency gaps (lay out how costed investments will play out with respect to the envelope, its base and increase over time).
- Hosting the G7 in 2018 will be a major milestone where domestic stakeholders and the international community will look to Canada’s example and leadership. From the treatment of development in Budget 2017 and the impressions of the IAR process, change is needed at Global Affairs Canada to get in shape and quickly. Or else we should not be surprised if development does not feature prominently in Canada’s G7 agenda come 2018.