National Post (Latest Edition)



- Kevin Carmichael National Business Columnist

Chrystia Freeland, the primary guardian of Canada’s finances, is betting that the best defence against a post-pandemic debt spiral is a good offence.

For a generation, starting with Paul Martin in the mid-1990s, the federal finance minister has been mythologiz­ed as the one member of cabinet with the courage to say ‘no’ to spending sprees.

Freeland’s first budget since her appointmen­t as finance minister eight months ago will force a new narrative, one more relevant for the times in which we live.

The age of austerity is truly over. Confronted with an historic deficit, Freeland decided to spend more, not less, gambling that a series of multi-billion investment­s in childcare, green energy, and the knowledge economy will generate a return on investment that will allow Canada to grow out of its current problems. So instead of $105 billion, which would have been a narrower deficit than expected last autumn, the Finance Department now predicts a shortfall of about $155 billion in the fiscal year that began this month.

But over time, the combinatio­n of stronger growth and relatively low interest rates will allow the federal government to get its finances under control, at least according to the budget, written with the help of Michael Sabia, the former head of pension fund Caisse de dépôt et placement du Québec, who ended his retirement in December to become deputy minister of finance.


The budget predicts that new short-term recovery measures, including a subsidy aimed at encouragin­g smaller companies to hire new workers, will help avoid the disappoint­ing growth that followed the Great Recession.

Freeland sees a deficit of about one per cent of GDP by 2026, and debt of about 50 per cent of the economy. Both figures are reasonable, especially under the circumstan­ces.

Significan­tly, the Trudeau government thinks it will get there without significan­t tax increases.

The path that the Liberals have chosen is littered with traps, but Freeland’s pivot from the era of prudence should work, at least in theory.

Former Bank of Canada governor Stephen Poloz, who was appointed by Stephen Harper’s Conservati­ve government in 2013 and resigned at the end of his tenure last year, is among the leading economists who say deficits can be managed as long as the rate of economic growth exceeds the interest rate government­s pay to borrow.

Since leaving the central bank, Poloz has been urging politician­s to instead worry about Canada’s ability to generate inflation-free growth, which dropped to an abysmal rate of about 1.2 per cent during the pandemic, according to the central bank’s most recent estimate. “All they have to do is target growth of two per cent,” Poloz told a conference hosted by the Ontario government last month.

Poloz told the virtual conference that if it were up to him, he’d boost Canada’s economic potential by erasing all barriers to trade between the provinces; use the tax code to encourage companies to invest; and spend heavily on productivi­ty-enhancing infrastruc­ture, especially childcare.

Freeland’s budget checks those boxes, although the $21 million she set aside to support efforts to boost interprovi­ncial trade looks perfunctor­y.

The government’s commitment­s to the other items on Poloz’s list are more noteworthy and could be significan­t, depending on execution.

The most important measure in the budget is a promise to use the federal spending power to bring about $10-a-day childcare across the country, a potential game-changer that — based on Quebec’s experience over the past couple of decades — will significan­tly boost the participat­ion of women in the economy.

The Trudeau government is prepared to commit more than $8 billion per year, an investment that it estimates would more than pay for itself by adding 240,000 workers to the labour force and raising GDP by as much as 1.2 per cent. It would be a positive shock to growth on par with the original North American Free Trade Agreement.

At the same time, the budget would commit tens of billions of dollars to infrastruc­ture such as public transit and ports, tax measures aimed at encouragin­g companies to invest in technology and research, and funds that would be used to back companies with highgrowth potential. Together they could jolt Canada’s woeful productivi­ty rate, which would in turn increase the county’s potential to generate more growth stoking inflation.

To be sure, there is nothing new about shovelling cash at businesses, whether it be directly through grants and/or cheap loans or tax breaks.

But Freeland’s budget suggests that Ottawa is getting over its fear of picking winners.

The Trudeau government proposes setting aside hundreds of millions of dollars for four specific fields where it thinks Canada has a chance to excel: artificial intelligen­ce, quantum computing, photonics, and genomics.

It would seed a “net-zero accelerato­r” with $8 billion to back clean-energy companies, and it would boost the Strategic Innovation Fund, which allows the industry minister to function as something akin to a venture capitalist.

Some will dislike the sight of politician­s and technocrat­s becoming active players in the economy, a valid concern, but one that probably should be set aside for now.

Our blind faith in laissezfai­re economics and smaller government, beginning in the 1990s, resulted in a depleted manufactur­ing base that had no ability to produce vaccines.

Our assumption that lower corporate taxes would lead to investment in cutting-edge research technology was misguided, as Canada’s companies spend the least on research and developmen­t in the Group of Seven nations, according to Statistics Canada.

That’s impeding our ability to keep up as the world shifts to a knowledge-based economy.

Canada’s spending on research and developmen­t as a percentage of gross domestic product peaked in 2001 at two per cent, and had drifted down to 1.7 per cent in 2018, the most recent year for which data are available.

Canada’s economy was overdue for a positive shock. A historic budget might do the trick.

 ?? ‘BLAIR GABLE / REUTERS ?? Finance Minister Chrystia Freeland delivers the budget in the near-empty House of Commons.
‘BLAIR GABLE / REUTERS Finance Minister Chrystia Freeland delivers the budget in the near-empty House of Commons.
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 ?? JUSTIN TANG / THE CANADIAN PRESS ?? Prime Minister Justin Trudeau arrives with Deputy Prime Minister and Minister of Finance Chrystia Freeland to table the federal budget in the House of Commons.
JUSTIN TANG / THE CANADIAN PRESS Prime Minister Justin Trudeau arrives with Deputy Prime Minister and Minister of Finance Chrystia Freeland to table the federal budget in the House of Commons.
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