CANADA AHEAD OF THE CURVE ON FISCAL STIMULUS: OECD.
OTTAWA• Canada is emerging ahead of the pack as an increasing number of economic bodies around the world are calling on governments to ramp up public spending amid stubbornly weak global economic growth.
The Organization for Economic Co- operation and Development said in a report Thursday that more public investment is needed in advanced economies as it becomes clear that monetary policy alone has failed to stoke growth.
Many central banks have brought their interest rates down to zero and even attempted to buy long- term bonds in a bid to invigorate their economies.
Those efforts alone now appear set to fail, the OECD said as it downgraded its 2016 global growth outlook by 0.3 points to three per cent, matching last year’s underwhelming growth rate. Canada received one of the sharpest downgrades, with growth predicted to average only 1.4 per cent this year, compared with a forecast of two per cent made in November.
But economists noted even as Canadian growth lags, the country has emerged ahead of the curve as debt levels and the current budget allow it plenty of room to manoeuvre on the fiscal front in the way the OECD recommends.
“Canada stands out as one of the few countries that actually has the fiscal leeway to spend more,” said Emanuella Enenajor at Bank of America Merrill Lynch. “Our net debtto- GDP, if you combine federal, local and provincial, looks very low compared to our ... peers. So it makes sense that Canada is kind of leading the charge on this.”
Canada’s Liberal government was swept into power on a platform that included spending a sizable amount on infrastructure to inflate the economy, which was originally proposed as part of a $10-billion deficit in the first fiscal year. That deficit is now expected to be considerably larger when the budget is unveiled, likely late next month. Prime Minister Justin Trudeau has already announced fast-tracked stimulus of $700 million for Alberta and another $ 300 million for Saskatchewan.
Avery Shenfeld, chief economist at CIBC World Markets, said the federal government could work with a $ 30- to $ 40- billion budget deficit and not risk its goal of reducing the debt-to- GDP ratio by the end of the Liberal mandate. Even a $40-billion deficit, which would be the largest since the Harper government’s more than $50-billion deficit during the Great Recession, would sit at roughly two per cent of GDP.
“We have room to move in the other direction at the federal level, given the progress we made in earlier decades in lowering net debt-to- GDP,” Shenfeld said in an interview.
The economist notes that even ramping up the deficit to $40 billion would leave it at a ratio below the current 2.5- per- cent deficit the U. S. government is running ( its lowest deficit in seven years).
The OECD joins a growing list of voices that now argue monetary policy alone is no longer enough to stoke the world’s economy. It cautioned Thursday that continuing to rely solely on monetary policy risks creating a “low-growth equilibrium” where weak demand, low investment and low inflation linger.
At the moment, many of the world’s advanced economies, such as the U. S. and those in the eurozone, have avoided resorting to fiscal tools to kick-start their economies. Some countries faced with large budget deficits, such as Japan, are cutting back on spending entirely. That makes Canada one of the few countries that is actively planning to undertake a large spending program to reignite its struggling economy.
But Enenajor stressed government spending should only be seen as a stopgap solution. The idea is that spending now will help buy more time for businesses to ramp up investment and hiring, which will ultimately be the key to sustainable economic growth.
“It’s important to highlight that the private sector needs to be there,” she said. “We need to have a handoff, and if we don’t, then we’re going to have problems because we’re going to be stuck on the government spending IV-drip.”
The federal government is facing pressure to not run too far from its election promises, however. Finance Minister Bill Morneau said earlier this week that balancing the budget in Canada is now a “long-term” goal, prompting criticism from Conservative finance critic Lisa Raitt that deficit spending could run away in the country.
Still, economists note that Canada debating how much, rather than whether, to spend puts it ahead of other advanced economies.
“Canada is actually listening to economists in a way that politicians in other countries are not,” said Shenfeld.