FINANCE MINISTERS’ EMPHASIS OFF TARGET
Competitiveness, debt are more pressing than social issues, Kevin Carmichael writes
Writing about Canada’s economy was fairly straightforward for awhile.
The country was a fiscal disaster in the 1990s, leaving politicians little choice but to cut spending or face the wrath of the bond vigilantes. The Bank of Canada was under the impression that its job might be as simple as raising and lowering its benchmark interest rate to keep annual inflation at two per cent. The 1988 election had settled the debate over freer trade: The benefits easily outweighed the costs. Taxes were high, so once the budgets were balanced, there was no point arguing that they should stay there.
Maybe it was good that the analysts of my generation had this time to warm up their thinking muscles because there is nothing easy about sorting out the right policies for Canada in 2018. The frames of the 1990s and the 2000s don’t suit modern renderings of the economy, which feature chaotic displays of angst over the future of work, extreme household debt, the merits of trade, climate change, and chronically weak economic growth, among other things.
I’m unsure the just-finished budget season did much to clarify where Canada is headed. That’s a missed opportunity because the economy already is slowing after a year of out-sized growth. The lack of focus suggests he country’s finance ministers should get together more often to think about where they want to go and the policies that will be required to get there.
There are four broad themes that policy-makers and the men and women who influence them need to take seriously: climate change, competitiveness, debt, and inequality.
Let’s set climate change aside for another time; existential threats warrant columns of their own.
Of the other three, competitiveness and debt probably are the most urgent, if only because bold decisions made in another era left Canada with a social safety net that so far has prevented a critical mass of citizens from being left behind. Feeble businesses and excessive debt are present dangers, and therefore warrant immediate attention. And yet Canada’s finance ministers over the past couple of months mostly emphasized the social issues associated with inequality alone.
It’s wise to think about heading off the sort of social upheaval that grips Donald Trump’s America, but it’s a puzzle to me how the federal government, Ontario and Quebec could present financial plans that would do little, if anything, to offset what Trump is doing to business sentiment.
The gamble seems to be that the North American Free Trade Agreement will get sorted and that economic and political stability and an openness to immigrants will ensure that Canada wins its share of international investment. “It’s our value proposition,” Innovation Minister Navdeep Bains said this week of the country’s relatively liberal visa rules for skilled labour.
There’s something to that.
Tech companies everywhere face shortages of engineers, so they will be attracted to places where they can assemble a staff.
Still, the Bank of Canada has said repeatedly this year that uncertainty over what tariff Trump might apply, or what trade agreement he might end, was causing international investors to bypass Canada and go straight to the United States. Trump’s business tax cuts are an extra incentive to choose the U.S. over Canada or Mexico as a base in North America, the central bank said.
“I love Canada, I’m committed to Canada, but if we don’t start getting people that understand that business needs to be competitive and stop putting the burden on business, they’re going to go. I’m worried,” Don Walker, chief executive of Magna International Inc., told an audience in Toronto in February.
Some will dismiss comments like that as self-serving hyperbole. But there is no denying that the various carbon taxes, Finance Minister Bill Morneau’s fight with the small-business lobby over tax loopholes and Ontario’s decision to increase the minimum wage have created a bad vibe among entrepreneurs and executives. That matters, especially when the U.S. president is prepared to use every means available to corral new investment.
“We are creating a bigger wedge in a lot of areas,” said
Mark Chandler, head of Canadian fixed income and currency strategy at RBC Capital Markets. “Things like car output don’t necessarily drop off in a year or two, but Canada loses the beauty contest for a new vehicle line, and eventually the plant closes.”
Chandler also is concerned that so many governments made so little effort to constrain spending, especially since all of them benefited from windfalls thanks to stronger-than-expected economic growth.
British Columbia, perhaps the country’s fittest economy, recorded another balanced budget. So did Quebec, which also pulled money from a special reserve fund to make a big debt payment. Quebec Premier Phillippe Couillard and Finance Minister Carlos Leitao have orchestrated an impressive economic renaissance. The Liberal government ended decades of profligacy, and Quebec can now borrow at about the same rate as Ontario. The province’s unemployment rate is the lowest since the 1970s.
Couillard, who trails in polls ahead of an election later this year, plans to increase spending, but not by an amount that caused alarm. That’s the opposite of his counterpart in Ontario, Kathleen Wynne. She also trails in polls ahead of an election, yet she signed off on a plan that will return Ontario to deficit one year after it finally recorded a surplus. Quebec’s example makes it harder for the Ontario Liberals to argue they had little choice. “If you can’t balance the budget at the top of the business cycle when can you?” Leitao told reporters after he released his budget this week.
That’s a great line. But Leitao, the former chief economist at Montreal-based Laurentian Bank, would know that creditors would react negatively if he didn’t talk tough about deficits, given the province’s history. Debt still is about 50 per cent of gross domestic product, manageable, but barely.
Ontario, given its overall track record, gets more leeway. Finance Minister Charles Sousa said he would keep deficits small; about one per cent of GDP.
Sousa also insisted there is more to running an economy than a budget surplus. He’s right about that. Research by the International Monetary
Fund suggests that deficits can leave societies better off as long as the borrowing is used to finance things that expand the economy’s ability to generate wealth. And this is where Sousa and some of his counterparts will have difficulty explaining themselves. Ontario’s plan to offer free, pre-kindergarten daycare will allow previously housebound parents to join the workforce. It will be harder to argue that free drugs for seniors is anything other than a preelection sop.
But perhaps Canada wants to be a country that uses a portion of its wealth to give away medicine? New Democratic Party Leader Jagmeet Singh would implement a national pharmacare program, and Morneau said in his budget that the Trudeau government is going to study the idea.
It would ease anxiety and leave consumers with more money to spend. But is that really where the emphasis of the country’s finance ministers should be right now?
It doesn’t seem like they have given that question much thought.
They should.