No to a fiscal anchor, but yes to a guardrail
You get the sense that Prime Minister Justin Trudeau’s government is at least a little sensitive about the amount of money that it’s spending to fight the COVID-19 crisis.
Finance Minister Chrystia Freeland’s budget update on Monday appeared to justify the unprecedented spending by noting that Canada suffered the “fourth- largest” decline in gross domestic product among the G7 legacy economic powers. That makes Canada the median in a very small sample: three of the United States, Japan, Germany, France, Britain and Italy made out better, and three did worse.
But there is nothing middling about the Trudeau government’s response to the pandemic and the economic effects of mandated lockdowns: a rescue package valued at $ 407 billion and counting, or 19 per cent of GDP, puts Canada right at the top of the G7 league table, along with Japan.
Bottom line: the economic devastation Canada has endured is roughly equivalent to that of every other country in its peer group, while its rescue efforts have been off the charts.
A “fiscal anchor” would silence virtually all of the government’s critics outside the official Opposition and a few conservative think tanks. It needn’t be a plan to balance the budget, or even to get the debt back within sight of its pre- crisis level of about 30 per cent of GDP. But something that would show Trudeau understands he should hedge against a spike in interest rates.
David Dodge, the former Bank of Canada governor, has suggested keeping debt- service costs below 10 per cent of revenue. There are other possibilities. The point is to create a line cabinet won’t cross, and, therefore, a benchmark against which it can be measured. It’s not austerity, it’s accountability. And yet Freeland couldn’t quite bring herself to go there.
“When the economy has recovered, the time- limited stimulus will be withdrawn and Canada will resume a prudent and responsible fiscal path, based on a longterm fiscal anchor we will outline when the economy is more stable,” she said in the budget update.
She did offer one concession to the fiscal prudes: “guardrails.”
Freeland said she would keep an eye on “several related indicators,” including the employment rate and total hours worked, to get a sense of when stimulus should end and the return to normality begins. Trying to guess when that moment might arrive isn’t a priority for Freeland right now, seeing that she also pledged to spend as much as $ 100 billion on a three-year recovery plan that will be triggered as soon as COVID-19 is under control.
“Make no mistake,” she said. “We commit to providing fiscal support until the economy is firmly back on track. As we have learned from past recessions, there is danger in providing too little support to our economy, and also in withdrawing support too soon.”
That’s true. Former prime minister Stephen Harper probably declared victory too hastily after the Great Recession. His stubborn return to a balanced budget ended up colliding with an economic downturn when oil prices collapsed in 2014 and 2015. Harper and most everyone else in Ottawa had failed to notice that the recession wiped out a significant portion of Canada’s industrial capacity. Exports languished as the global economy recovered in 2010 because the country’s population of exporters was left diminished. The economy could have done with a little more demand.
If Trudeau and Freeland can keep that from happening again, the extraordinary spending could be worth it. The most important estimate that Finance provided might be its revised projection for potential growth, or the pace of expansion the economy can handle without causing inflation.
The new number is an annual increase of 1.4 per cent between 2020 and 2025, compared with 1.8 per cent
before the crisis. Unless we boost our ability to generate more inflation- free growth, the economy will be about $ 50- billion smaller in 2025 than it would have been if not for the pandemic. Think of that number as the opportunity cost of choosing to muddle along like we did when we relied on booming oil prices to pad our export wealth.
There will be a considerable degree of agonizing over the size of the debt and deficit. There shouldn’t be. Trudeau and Freeland are simply following the lesson plan created over the past decade by outfits such as the International Monetary Fund and the Organisation for Economic Co-operation and Development. Only in the outer rim of social media are these organizations seen as anything other than repositories of mainstream economic thinking.
There is nothing radical about what the federal government is doing, but it is still in the easier phase of the crisis response, where the answers are relatively simple: get money to people as quickly as possible.
The Trudeau government has always been pretty good at that challenge. Its signature economic policy before the crisis was the Canada Child Benefit, a program on which Freeland intends to lean again, pledging $ 2.4 billion in 2021 for enhanced payments to lowand middle- income families with children less than six years of age.
It’s a reasonable stopgap for families — mostly working mothers — who have been pushed to the limits by this crisis. But what Canada really needs is a massive push to implement a nationwide system of affordable daycare, which study after study shows would pay for itself by boosting the economy’s growth potential.
Freeland made no promises. She said she will be putting her recovery plan together over the winter in time for next year’s budget. The guardrails for that phase of the rescue effort should be “quality” of spending, not “quantity.”
THERE IS DANGER IN PROVIDING TOO LITTLE SUPPORT.