Ottawa has COVID tunnel vision

Business leaders worry politicians too transfixed by short-term

Speaking at a virtual conference on the state of the economy, Penny Wise, president of 3M Co.'s Canadian unit, hadn't been given an opportunity to state what keeps her up at night, so she used her last few minutes to share her worries about where the economy is headed.

“We really need to think about how to position ourselves for the future, and not let the future come to us,” she said at the event organized by the Canadian Chamber of Commerce on Wednesday.

Everyone knows the pandemic represents the gravest threat Canada has faced since the Second World War. But by obsessing daily over the country's place in the vaccination league tables at the expense of everything else, we risk forgetting that we're also in the midst of an economic reordering that is comparable to the Industrial Revolution or the mass adoption of personal computers.

If we ride that wave successfully, we'll be set. If we don't, we'll be one of those nations that muddles along, weighed down by debt that we can barely afford.

“You need to manage the short term, but you need a plan for the long term for all the stakeholders to be able to move forward,” said Monique Leroux, a strategic adviser at Fiera Capital Corp., a Montreal-based wealth management firm that oversees assets worth about $180 billion, who also spoke at the conference.

Wise and Leroux weren't a tag team. Leroux spoke in the morning and Wise was on a panel in the afternoon. Taken together, though, their comments reflect a sense of trepidation about what Prime Minister Justin Trudeau will do with the $100 billion he said he is prepared to spend on “stimulus” that “will help us grow out of this recession towards an economy that is greener, more innovative, more inclusive and more competitive.”

Trudeau has the right idea. We're more talkers than doers when it comes to climate change, so it's past time to get serious. Years of underinvestment mean the economy is only capable of growing at an annual rate of about 1.5 per cent before it starts to overheat, according to the Bank of Canada, which is way too slow to support the quality of life to which we've become accustomed. We've relied on periodic oil-price booms to make up for a complacent attitude about global competitiveness for decades. The shift to a carbon-light economy means that's no longer viable.

“Structural challenges that existed prior to the pandemic remain,” International Monetary Fund economists said this week after their annual review of the Canadian economy. “Canada still needs to boost its productivity, support productivity-enhancing investments, and diversify beyond traditional sectors, including oil.”

It was a crucial observation, but the IMF line that got the most attention was its contention that Trudeau's plan to spend four per cent of gross domestic product over three years “needs further justification,” since additional spending beyond what's already been deployed “could weaken the credibility of the fiscal framework.”

The fund's assessment wasn't a surprise: Trudeau's stated intentions in the fall economic statement didn't include anything specific about how that money would be spent, or why it was needed. Still, it probably stung a little, as Canada tends to be at the front of the class when it comes to the IMF's centrist teachings.

The fund praised Canadian authorities for taking “timely, decisive, and well-coordinated policy actions” in response to the pandemic, and it raised Canada's economic outlook this year to growth of 4.4 per cent. But it wasn't willing to endorse a second massive spending program on faith alone. It scolded the Trudeau government for its stubborn refusal to set out clear spending limits, while at the same warning that a “lack of information” about the “specific conditions” that would cause the feds to taper emergency spending “could add to uncertainty.”

There's a message for Trudeau and Finance Minister Chrystia Freeland in all of this: their government lacks the credibility necessary for the global business community, and the wise men and women who advise it, to give it carte blanche.

The IMF report was followed a day later by the release of the latest from an ad hoc tax-and-spend advisory group of retired policy-makers and economists assembled by the C.D. Howe Institute, a Toronto-based thinktank.

“Overall, the group,” led by John Manley, a former federal finance minister, and Janice MacKinnon, a former Saskatchewan finance minister, “is not convinced that a large post-pandemic stimulus package is appropriate,” it said in minutes of a meeting held on Jan. 29. “Members argued that any further debt-financed stimulus should be temporary, essential, and targeted to improving the economy's economic capacity.”

Canada is nearing a limit to the amount of debt it can safely carry. The Conference Board of Canada on Feb. 18 published a report that estimates that all the emergency spending means the combined net debt of the federal, provincial and territorial governments will be about 100 per cent of gross domestic product, the highest since the early 1990s.

All that debt needn't be a reason to retreat. But it does mean there is little room for spending that doesn't expand the economy's ability to generate wealth. Executing will require more focus and discipline than the House Finance Committee showed this week in its pre-budget report, which includes 145 recommendations.

Freeland might focus instead on two themes: subsidized childcare and digital connectivity with an emphasis on rural broadband. Doing each right would be expensive, but both would pay for themselves by enabling more people to participate in the economy, which would increase the economy's ability to generate growth.

There will be other ideas. The point is that it's the quality of the spending that matters now, not the quantity.