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It was report card day for Ottawa on Tuesday, as the International Monetary Fund released its appraisal of the federal government’s economic stewardship during the COVID-19 crisis.
A team of IMF economists are regular visitors to Canada to offer a critical assessment of fiscal policy, under article IV of the Washington-based body’s articles of agreement. The subsequent “Article IV” report forecast robust economic growth of 4.4 per cent this year, after last year’s estimated contraction of 5.4 per cent.
Chrystia Freeland, the finance minister, was delighted to tout the report’s headline finding. “The IMF recognizes the decisive effect our government’s actions have had in stabilizing the Canadian economy and supporting people throughout this crisis,” she said.
Referring to her upcoming budget, Freeland said the Liberal government plans to make “meaningful investments” in order to, in the language of the day, “come roaring back.”
To be fair to the government, it scored an above average grade for taking “timely, decisive and well-coordinated policy action” in response to the pandemic.
But the acclaim came with a qualifying statement. The IMF registered reservations over the Liberal plan to spend up to four per cent of GDP ($100 billion) over the next three years to support recovery. Article IV reports are masterpieces of understatement, on a par with the British airline pilot flying through a volcanic ash cloud, who famously told passengers: “We have a small problem – all four engines have stopped.” (They started again).
It is safe to assume that the IMF team was unsettled by the prospect of such massive expenditure in an election year, even if it was too polite to put it so brazenly.
“Prior to embarking on any new spending, it would be important to ensure its composition achieves well-defined objectives, including enhancing long-term growth,” the report said – the bureaucratic equivalent of Star Trek’s red alert klaxon.
“While the government still has some fiscal space, the additional spending, if deemed unjustified, could weaken the credibility of the fiscal framework,” the report concluded.
Fears that the government might use a pre-election budget splurge to induce voters is at the heart of the latest paper by the C.D. Howe Institute’s fiscal and tax working group, released on Wednesday. This collection of economists and former politicians is not constrained by the diplomatic niceties that govern the IMF and was blunt in its assessment.
“The group remains unconvinced a large stimulus package is appropriate at this time,” it said. On-going unfunded spending will see federal/provincial net debt surpass 100 per cent of GDP within a decade, potentially limiting the appetite of lenders for Canadian government debt, it added.
Inflation and higher interest rates may return sooner than “generally assumed,” the group said, a veiled shot at the disdain for prudence in current Liberal circles.
Chaired by former Liberal finance minister, John Manley, and ex- Saskatchewan NDP finance minister, Janice MacKinnon, the group also includes (among others) Robert Asselin, a former advisor to Liberal finance minister Bill Morneau, and two well-respected ex-finance department officials, Paul Boothe and Michael Horgan.
The failure to persuade businesses to invest in this country may be imperceptible to voters but the consequences will be damaging
Guided by the lamp of experience, this august group is clearly not buying the bromides about “building back better.” Debt financed stimulus should be “temporary, essential and targeted to improve the economy’s productive capacity,” they said. “Spend only if necessary.”
New permanent measures should be accompanied by tax hikes to fund them, it said.
Freeland’s mandate letter from the prime minister should have allayed some of these concerns. In supporting businesses and people, “you will avoid creating permanent new spending,” it said. Despite that, earlier this month the government announced a $3 billion permanent public transit fund, in what one advisor called a “down-payment on stimulus.”
As the C.D. Howe paper noted, Freeland’s fall fiscal update did not account for substantial hikes in Employment Insurance premiums that will be needed if the account is to remain self-funding over time, far less factor in big ticket items like national childcare, national pharmacare, a new Canada Disability Benefit or an increase in Old Age Security for over 75-year-olds.
How will those on-going spending commitments be funded, if not from the $100-billion stimulus pot?
The C.D. Howe group did not quibble with the $250 billion spent in direct aid to households and businesses over the course of the pandemic. But it urged that any new expenditure be directed towards things that will boost economic capacity – one-time investments in digital infrastructure to connect all parts of Canada to high-speed internet, for example. The group also suggested a temporary refundable investment tax credit to incentivize companies to shift capital to Canada. The failure to persuade businesses to invest in this country may be imperceptible to voters but the consequences will be damaging and long-lasting.
New investment per worker in Canada in 2020 was about 58¢ per dollar invested in the U.S. – the lowest since the beginning of the 1990s.
The esteemed group of former policy-makers at C.D. Howe are hardly partisan.
But even they have noted an apparent indifference to wealth creation in Justin Trudeau’s iteration of the Liberal Party.
“Business confidence is the cheapest stimulus and some members expressed concern that the tone of federal communications is not helpful to business confidence,” the paper said.
That is something that an able communicator like Freeland should address in her budget.
The Liberals may have got a gold star from the IMF for their pandemic response but the C.D. Howe offered a more clear-eyed appraisal of their economic recovery plan. It reminded me of many a childhood report card: “Would improve if there was less talk, more action and co-operated more.”
Copyright Postmedia Network Inc., 2021