COVID-19 not the only economic headwind on the horizon for Manitoba, budget warns

The latest Manitoba budget warns of potentially gloomy economic headwinds on the horizon, from the impacts of COVID-19 to international trade uncertainty.

But the Progressive Conservative government insists its plan will enable the province to weather a significant economic downturn — now a far more likely scenario than when the budget was originally prepared.

The 2020 budget, which was delivered Thursday after being held up more than a week by procedural delays in the Manitoba Legislature by the Manitoba NDP, now comes with a supplementary document that takes into account the remarkable economic shift since the first cases of COVID-19 in the province were announced a week ago.

The revised spending plan released Thursday now calls for $229 million of a planned $300-million injection into the province's rainy-day fund to occur this month, with the rest by the end of the next fiscal year. The cash will top up the emergency fund to $872 million.

The province's budget is now forecasting three consecutive quarters of economic decline, which meets the technical definition for a recession. 

While COVID-19 is the economic factor that is top of mind right now, the budget documents point to international trade uncertainty, climate change, extreme weather events and wildfires, and overspending on major Manitoba Hydro projects as other potential economic stumbling blocks.

'Most emergency-ready budget'

The financial performance of Manitoba Hydro is "one of the single largest risks to our ability to balance the budget," the province's documents say.

As major projects like the Keeyask Generating Station and the Manitoba-Minnesota Transmission Project come online, carrying costs — including costs associated with amortization and interest — will affect Manitoba Hydro's bottom line, the budget documents say. As well, Hydro's revenue could be affected by factors like weather and energy export prices.

Poor market conditions for mining and petroleum — Manitoba's third-largest primary resource industry — have kept commodity prices low, the province notes.

Global trade challenges, meanwhile, cut Manitoba's international trade growth to 2.1 per cent in 2019, compared to 11.6 per cent growth in 2018. A hard crop season last year and China's restriction on Canadian canola imports bit into canola and soybean sales.

The 2020 budget breaks down the potential positive or negative impacts of certain factors on the province's bottom line:

• Total summary revenue: This could go up or down by $209 million for each percentage point change in Manitoba's nominal GDP growth.
• Personal income tax revenue: could go up or down by $38 million for each percentage point change in personal income.
• Sales tax revenue: could go up or down by $12 million for each percentage point change in retail sales levels.
• Fuel taxes revenue: could go up or down by $9 million for each percentage point change in real GDP.

In addition to boosting the province's rainy-day fund, the Manitoba government will also spend more on its emergency expenditures fund, increasing the annual allotment to $100 million — an increase of $57 million over 2019.

Unlike the rainy-day fund, emergency expenditures are set aside to prepare for challenges like flooding and forest fires — events that are anticipated each year, but vary in their severity.

Last week, Finance Minister Scott Fielding touted the 2020-21 spending plan as "the most emergency-ready budget in Manitoba history."

A 'more insulated' economy: Fielding

The commitment to top up the province's rainy-day fund will make good on the goal of keeping the fund's balance at five per cent of provincial GDP, Fielding told reporters, who agreed to keep budget information under embargo, on March 11, when the provincial spending plan was supposed to be released.

The fund is "liquid cash," he said, set aside for unforeseen emergencies.

"I want Manitobans to know that our government is prepared and we have a plan to deal with any downturns in the economy," he said last week.

But a lot has changed in succeeding days. On March 12, the province identified its first cases of coronavirus. Temporary business closures and mass layoffs quickly followed, potentially upending the provincial economy.

In Thursday's addition to the budget, the government suggests Manitoba's diversified economic base can withstand the pandemic, even if the tourism, oil and gas production and supply chain-dependent sectors are negatively affected.

Based on preliminary estimates, the first three quarters of 2020 will see economic declines — real GDP drops of 1.3 per cent in the first quarter, 0.7 per cent in the second and 0.1 per cent in the third.

The province expects a turnaround will begin by the second quarter due to federal initiatives to stimulate the economy. Growth is expected to strengthen in the second half of the year as pent-up demand from consumers and businesses lifts the economy. 

The government is now reluctant to make estimates about its bottom line for the upcoming fiscal year because of the rapidly changing situation around COVID-19. 

In a worst-case scenario, the province's preliminary estimates say revenue could drop $682 million more than originally projected, due to higher health-care costs and other hits to the economy.

However, even before Manitoba's first coronavirus case was reported, the province's budget took a more conservative estimate of economic growth than usual, Fielding said. It includes $500 million in spending that could be saved if necessary by delaying planned projects, the finance minsiter said — although he didn't say which projects might be deferred.

He said there's reason for optimism thanks to Manitoba's diversified economy, which he said could insulate the province from economic downturns around the world.

"Manitoba has the most diverse economy in Canada, by far," Fielding said. "What that means is in times of crisis, we are a little bit more insulated. We have a very resilient economy here."