FI­NANCE MIN­IS­TERS’ EM­PHA­SIS OFF TAR­GET

Com­pet­i­tive­ness, debt are more press­ing than so­cial is­sues, Kevin Carmichael writes

Regina Leader-Post - - FRONT PAGE -

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.

JUSTIN TANG/THE CANA­DIAN PRESS FILES

Fi­nance Min­is­ter Bill Morneau par­tic­i­pates in a post-bud­get dis­cus­sion in Ot­tawa on Feb. 28. Fol­low­ing a lack of clar­ity from govern­ment bud­gets over where Canada is headed, pol­icy-mak­ers need to turn their fo­cus to cli­mate change, com­pet­i­tive­ness,...

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