Liberals going back to the ’90s
COMMENT When times are good ... spend more money?
Let’s hope nobody in the Prime Minister’s Office heard the speech made Monday by Bank of Canada senior deputy governor Carolyn Wilkins.
In front of an audience in Winnipeg, she suggested there has been an encouraging “broadening” of economic activity across all regions and sectors. Executives are responding optimistically to questions about future sales and investment, with 70 per cent of industries expanding at a rate not seen since the oil-price shock in 2015.
“It’s the kind of diversity that helps support strong and sustained overall growth,” she said.
You can almost see the thought bubbles in the PMO: “She said diversity. We love diversity. Let’s spend some more money.”
But the surprisingly buoyant economic news is not a license to splurge.
Wilkins’ speech suggests that despite the uncertainty in the United States and worries about the housing market here at home, the Bank is coming around to the idea that this recovery is for real. And with recovery comes rising interest rates, as surely as thunder accompanies lightning.
There were concerns in the Bank’s April statement that residential investment was not sustainable. Those fears appear well- placed — housing starts are still running at the strongest pace in five years, but data last week suggested a cooling in homebuilding activity in May.
There are also worries about the “moderate” growth in wages and hours worked.
However, Wilkins presented a picture of an economy in recovery mode, with bright spots right across the country and in both goods and services.
That picture is reinforced by last Friday’s jobs numbers, which showed Canada added 54,500 net jobs in May, almost entirely in fulltime, private sector work.
A clue to the Bank’s future thinking was offered by her opinion that the economic drag of lower oil prices is now largely behind us, thanks in part to a historically low overnight rate of 0.5 per cent.
On July 12, the Bank’s governing council will meet to decide if monetary policy stimulus is still required.
Given the political melodrama playing out to the south, it may be too early for a sea change.
First, the Bank will have to condition millennials, who have never known an interest rate rise, to the concept that money doesn’t come for free.
But a return to more historically normal interest rates will come — the bank rate averaged 5.93 per cent between 1990 and 2017 — and the Trudeau government is ill- prepared for the potential sticker shock.
Kevin Page, the former Parliamentary Budget Officer and current president of the Institute of Fiscal Studies and Democracy at University of Ottawa, pointed out that in 1990, when the overnight rate was at 13 per cent, the federal government was paying $ 0.38 of every dollar of revenue in public debt charges, compared to the $ 0.08 per dollar it pays currently.
“We’re in a sweet zone right now,” said Page.
The Trudeau government’s budget documents suggest the federal debt will rise by $ 146 billion over a six- year period — and that does not include the $62 billion in additional defence spending revealed last week, which Page noted adds half a percentage point a year to program expenses.
“If you look at the history of countries running up debt, they sleepwalk into this stuff. There’s a bit of a boom, they say, ‘ Let’s do something for the middle class, for infrastructure, for childcare.’ But this stuff is structural and once rates start normalizing, debt gets really heavy,” he said. “We’re re- living the ’ 80s and early ’90s.”
The return to health of the private sector in much of the economy would make a more prudent government take stock.
Ottawa is forecast to be in deficit for decades, in large part because of government efforts to stimulate demand. But if the economy grows at anywhere close to three per cent a year, it becomes hard to argue in favour of debtfinanced spending.
Unless, that is, you think deficit targets and spending controls are for squares. In that case, why not go back to the days when the Internet was in its infancy, The Simpsons had just debuted and net debt charges, as a percentage of the economy, were four times what they are now? Retro. Cool. Don’t have a cow, man.