Freeland needs to reset her compass

Minister’s cheery address silent on economic growth plan

Around the mid- point of her virtual speech to the Toronto Global Economic Forum, Chrystia Freeland stopped and said the thinking she had outlined was “entirely uncontroversial.”

The finance minister was right — protecting Canadians’ health, jobs and living standards by using aggressive federal stimulus is an article of faith for politicians across the spectrum.

Nobody believes Ottawa should have watched families and businesses go broke during the pandemic.

But it was the rest of her speech — and what was missing — that is more problematic.

Freeland said her rural, northern Alberta roots means she is not steeped in the ideas of “helicopter money” but that Canada can afford its current spending spree because interest charges, as a share of GDP, are at 100-year lows.

She said the “terror and triumph” of the debt crisis in the mid-1990s was formative for a generation of Canadians. “But it is a poor general who fights the last war,” she said, implicitly dismissing criticism from those who were in the trenches during those messy battles, people like former Bank of Canada governor David Dodge and ex-td Bank chief economist Don Drummond.

Freeland said not one of the factors that drove the fiscal crisis in the 1990s holds true today. “Doing too little is more dangerous and potentially more costly than doing too much.”

That is arguable; the fact that budgetary constraints remain an intrinsic foundation of economics is not.

Thankfully, she said she has no truck with Modern Monetary Theory, the idea that deficits don’t matter for governments that issue debts in their own currency.

Freeland said the expansive approach to fighting the pandemic “will not be infinite,” which is a relief.

The government will impose limits upon itself, “rather than waiting for the more brutal external restraints of international capital markets.”

But her boss Justin Trudeau has already revealed there will be no fiscal anchor in the fall update — a sentiment she echoed.

Freeland argued against “premature fiscal tightening.”

But that presents a false dichotomy — austerity or remaining adrift without a fiscal anchor.

We have no idea what the government thinks would be a reasonable deficit target going forward.

Drummond calculated recently that recurring $ 100- billion budgetary shortfalls would take the debt to GDP level to 63 per cent and program spending to more than 15 per cent of the economy.

Nor was there anything in Freeland’s speech to suggest how Canada will lay the foundations for the green, innovative, inclusive economy to which she aspires.

By happy coincidence, the Business Council of Canada released its own economic growth plan on Wednesday, filling in many of the gaps missing in the finance minister’s speech.

The council pointed out that Canada is in far less rosy shape than Freeland would have her audience believe. As a country, what we are producing is not covering what we are consuming, meaning we have a persistent current account deficit, as well as a fiscal deficit. We have an aging population, a problem growing firms to global scale and lagging business investment.

Some of the solutions were in train before the pandemic hit — attracting immigrants with specialized skill sets; retaining international students and increasing the labour force participation of women.

But in other areas, the conditions necessary for a robust recovery are worse than they were just a few years ago.

Canada’s business investment trails the OECD average and is eclipsed by spending in the U.S. “Canada has a reputation ( for being) difficult and extremely time-consuming to get large capital projects off the ground,” said the report’s authors.

The latest Bank of Canada monetary report, released Wednesday, offered little comfort on that front. Uncertainty is expected to act as a “significant drag” on investment decisions. The oil and gas sector is not forecast to return to pre- pandemic levels during the projection period — after a 30 per cent contraction in 2020, the Bank expects investment to grow by just two per cent in 2021-22.

Worse, Canadian companies are now expanding outside the country, rather than investing in Canada ( direct investment abroad in 2019 outweighed foreign direct investment by $804 billion.)

Other required fixes are long- standing and wellknown — increased spending on broadband coverage, enhanced interprovincial trade ( current restrictions act like a 6.9 per cent tariff ), more competitive personal income tax rates and streamlining an inefficient regulatory process.

But for all Freeland’s talk that the government has a plan — “We have a compass. We know how to get to a safe harbour and what to do when we get there” — there was very little on Canada’s approach to the digital economy.

It is a subject on which the Trudeau government has, as is its wont, talked a good game but made little progress.

Investment in intellectual property as a share of the economy has actually declined in Canada since 2005, compared to a sharp rise in the U.S.

Earlier this week, some members of the Council of Canadian Innovators, a business group focused on helping tech firms scale up, complained that innovation has barely been mentioned since the government set up its superclusters initiative.

The CCI and the new Business Council report both recommend that the government tilt the playing field toward fledgling tech companies by favouring homegrown firms in its procurement policies.

The Business Council lamented the number of promising companies leaving Canada. “It’s as though we were training high potential athletes, only to send them abroad to win Olympic medals for other countries,” it said.

The report suggested that individual departments and agencies, including the Canada Space Agency and the Department of National Defence, support procurement-led innovation.

“Government cannot avoid decisions about which market outcomes they prefer…full market neutrality is not possible,” it concluded.

The Liberal government has never been shy about picking winners and losers. It should have no qualms about an industrial strategy that secures anchor clients offering a steady source of revenue for promising firms.

The post- COVID world promises to be one in which states take a more active role to ensure self- reliance. Canada cannot ignore those sea changes.

To this point, the government has been silent on the world beyond the pandemic, apart from an overreliance on low interest rates as justification to keep spending.

But that is no substitute for sustained economic growth, about which the finance minister had little to say.

With the deficit on track to reach at least $343 billion this year, the cheery scenario she painted is not borne out by the facts.

Closer to the mark is the Business Council’s conclusion: “Canada’s economy is more fragile now than at any time since the 1930s.”