Trudeau calls for less fo­cus on mon­e­tary pol­icy

The Pak Banker - - 6BUSI­NESS -

Cana­dian Prime Min­is­ter Justin Trudeau is urg­ing global lead­ers to rely more on gov­ern­ment spend­ing and less on mon­e­tary pol­icy to spur growth as he pre­pares a bud­get that will push his coun­try into deficit.

In a wide-rang­ing in­ter­view Wed­nes­day in Van­cou­ver, Trudeau high­lighted the im­por­tance of in­fra­struc­ture spend­ing and mea­sures to bol­ster in­comes of mid­dle classes he says are crit­i­cal to driv­ing growth. He also de­fended his plan to go will­ingly into the red. "My mes­sage to other gov­ern­ment lead­ers is don't fall into the trap that think­ing that bal­anc­ing the books" is an end in it­self, he said. "It's a means to an end."

Trudeau's ar­rival on the global scene and his en­dorse­ment of deficits marks a sharp about face from his pre­de­ces­sor, Stephen Harper. Along with Ger­man Chan­cel­lor An­gela Merkel and U.K. Prime Min­is­ter David Cameron, Harper cham­pi­oned the bud­get aus­ter­ity al­liance within the Group of Seven that of­ten clashed with the U.S. on fis­cal pol­icy.

Pres­i­dent Barack Obama will hear a new mes­sage next week when he hosts a state din­ner for Trudeau at the White House. The Cana­dian leader's de­but also co­in­cides with an in­creas­ing sense in global cir­cles that mon­e­tary pol­icy is reach­ing its limit, fu­eled in part by Ja­pan's sur­prise move to adopt neg­a­tive in­ter­est rates that caused tur­moil in cur­rency mar­kets.

"Mak­ing sure mon­e­tary pol­icy and fis­cal pol­icy are aligned and com­ple­men­tary is ob­vi­ously a ben­e­fit to any econ­omy. But at the same time I don't want to be overly preachy," Trudeau said. Other coun­tries should con­sider bal­anced bud­gets when fea­si­ble "but don't make it the beall and end-all be­cause you may be miss­ing out on op­por­tu­ni­ties to grow your econ­omy -- to help cit­i­zens pros­per -- that too much rigid­ity would ac­tu­ally in­ter­fere with."

At a Group of 20 meet­ing in Shang­hai last week at­tended by Trudeau's fi­nance min­is­ter, Bill Morneau, of­fi­cials from the world's top economies com­mit­ted their gov­ern­ments to do­ing more to boost growth amid mount­ing con­cerns over the po­tency of mon­e­tary pol­icy.

Trudeau, 44, hinted he is con­sid­er­ing ex­pand­ing on pledges that have his coun­try on pace for a deficit of nearly C$30 bil­lion ($22.3 bil­lion) in the fis­cal year that be­gins April 1. Hav­ing promised C$10.5 bil­lion in new spend­ing dur­ing the cam­paign, Morneau de­liv­ered a fis­cal up­date last month show­ing the gov­ern­ment is start­ing from a deficit of C$18.4 bil­lion as Canada grap­ples with the oil-price shock.

"It's to me even more of a rea­son why we need to be in­vest­ing in­tel­li­gently in in­fra­struc­ture, in money in the pock­ets of the mid­dle class, to grow the econ­omy," Trudeau said of the fis­cal sit­u­a­tion he in­her­ited af­ter his ma­jor­ity win in the Oct. 19 elec­tion.

He of­fered no de­tail on what new spend­ing may be in­cluded in the bud­get, due March 22, but ruled out big-ticket sur­prises. "I don't think we need mas­sive stim­u­lus," he said. "There's a limit on how much you can flow in­fra­struc­ture dol­lars in a short time frame from a stand­ing start." A C$30 bil­lion deficit would be 1.5 per­cent of gross do­mes­tic prod­uct. That's a swing of 1.4 per­cent­age points, from an ex­pected deficit of 0.1 per­cent of GDP in the cur­rent year. Since the end of World War II, there have been only four one-year ex­pan­sion­ary fis­cal swings of more than 1.4 per­cent­age points of GDP.

Even with C$30 bil­lion in red ink, Canada's debt-to-GDP ra­tio would re­main among the low­est in the G-7. "That leaves us with more flex­i­bil­ity," Trudeau said. "If we were sit­ting at 90 per­cent debt to GDP, we prob­a­bly wouldn't be con­tem­plat­ing the kinds of things we know we're able to do. If in­ter­est rates were rad­i­cally dif­fer­ent -- much higher, to take money to in­vest in our econ­omy -- we'd be look­ing at dif­fer­ent kinds of in­vest­ments."

The com­modi­ties slump prompted the Bank of Canada to cut its overnight rate twice last year, to 0.5 per­cent, and has dimmed the eco­nomic out­look. This week, Statis­tics Canada re­ported that out­put grew just 1.2 per­cent in 2015, down from 2.5 per­cent in 2014. To Trudeau, that's a rea­son to spend more in­stead of tight­en­ing up to elim­i­nate the deficit, as Harper had ar­gued in last year's elec­tion cam­paign. "Cuts would have been ter­ri­ble for the econ­omy," Trudeau said. The new prime min­is­ter will stop short, how­ever, of open­ing the taps end­lessly, re­it­er­at­ing a com­mit­ment to low­er­ing Canada's debt-to-GDP ra­tio over time. "Balanc­ing that fis­cal re­spon­si­bil­ity that Lib­er­als have al­ways had with an un­der­stand­ing that in or­der to grow we need to in­vest," he said, "is the bal­ance we're work­ing hard to strike."

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