Prime Minister Justin Trudeau faced some heat when he told reporters during the 2021 election campaign that he doesn’t pay much attention to monetary policy and the Bank of Canada’s mandate to keep inflation at manageable levels. “You’ll forgive me if I’m not thinking about monetary policy. You’ll understand, I’m thinking about families,” Trudeau said at a campaign stop in Vancouver. But now, with inflation at levels not seen in decades, monetary policy is something that almost everyone in government is grappling with as the central bank raises interest rates to push down skyrocketing prices. Under Canada’s system, monetary policy (interest rates) is set by the Bank of Canada, while fiscal policy (spending) is up to the elected government. Speaking to reporters on Wednesday, Liberal MPs said they did not expect to see any major fiscal spending from Freeland as the central bank continues to fight inflation. “I’m a balanced guy. That might mean cuts in some places and some spending in others. That works for me,” said Liberal MP Greg Fergus. WATCH: Liberal MPs discuss priorities ahead of Freeland’s mini-budget
Liberal MPs discuss priorities ahead of Autumn Economic Statement
Quebec MP Greg Ferguson, Deputy Finance Minister Rachel Bendayan and Minister of Innovation, Science and Industry François-Philippe Champagne review the Fall Economic Bulletin, due for release Thursday. Ontario Liberal MP Marcus Poblowski said with interest rates this high, “times are a-changing.” “I think there’s more opportunity to be parsimonious,” he said. “Any debt we have will go up.” MP Rachel Bedayan, deputy finance minister, said the government had been “extremely fiscally responsible” and “plans to continue on that path”. Conservative leader Pierre Poiliev has made it clear what he wants: no new spending unless there are cuts elsewhere. Anything else would be “adding inflationary fuel to the fire,” Poulier said in question period on Wednesday. WATCH: Opposition leader questions Lib Dems on autumn economic statement
Opposition Leader questions Liberals on Autumn Economic Statement
The federal government will release its autumn economic statement on Thursday. During question period on Wednesday, Conservative Leader Pierre Poiliev asked Prime Minister Justin Trudeau whether his government would freeze spending and taxes. NDP Leader Jagmeet Singh said he wants Freeland to address what he calls corporate greed and reform the Employment Insurance (EI) program. Freeland has already pointed out that the government has tough times ahead. The era of cheap cash is over – rising interest rates will make it harder for businesses to borrow money, which could lead to downsizing and job losses. The significant increase in the Bank of Canada’s policy rate – from just 0.25 per cent in January to 3.75 per cent today – has also forced the government to review how much it will spend. The cost of servicing the federal debt is relatively low right now, but is poised to rise in the short to medium term. Randall Bartlett, senior director of Canadian finance at Desjardins Group and former Parliamentary Budget Officer (PBO) economist, told CBC News he expects borrowing costs to “rise sharply” in the coming months.
“We have to be smart now”
More than 50 percent of the government’s outstanding debt is in Treasury bills or short-term bonds, all of which mature in three years or less, according to government data. That means Ottawa will be forced to refinance some of its debt at higher interest rates — a conundrum it shares with homeowners struggling with mortgages in this higher interest rate environment. “I think we have to be prudent right now to make sure interest rates go up, government debt charges go up and debt servicing costs don’t get out of hand,” Bartlett told CBC News. The federal government is also hesitant about pumping in more stimulus spending — which could push up inflation and offset the Bank of Canada’s rate hikes, potentially making the fight against inflation longer and more arduous. Inflation — which raises the cost of staples like fresh fruit — limits the federal government’s ability to provide any new stimulus spending. (Ivanoh Demers/Radio-Canada) “Canadians are cutting costs and so is our government. That’s our part … to not make inflation worse and longer,” Freeland said at a recent event in Windsor, Ont. Instead, the government said it would consider targeted measures aimed at low-income families – the people most affected by higher consumer prices. The government recently passed legislation to temporarily double the GST rebate, and there is a bill before Parliament to make federal rent subsidies more generous to offset increased housing costs. “The federal government has shown much more restraint than most provinces,” Bartlett said, pointing to some provincial programs that send checks to almost all households. “The feds have been targeted and they’ve been mediocre in terms of revenue and GDP. Ultimately, they’ve kept some of that dust dry and that’s where I expect to see them moving forward,” he said. There are early signs that Ottawa’s fiscal health in the near term could be much better than anticipated, thanks to higher oil prices and rising personal and corporate taxes in this era of high inflation. According to data released last week through Public Accounts Canada, the government’s fiscal ledger, the budget deficit for the 2021-2020 fiscal year was $90.2 billion — significantly less than the $113.8 billion deficit which Freeland predicted in her April budget. In an economic and fiscal outlook published last month, the PBO projected a budget deficit of $25.8 billion — about 0.9 percent of GDP — for the 2022-23 fiscal year if the government pursues “status quo policies.” — meaning there won’t be any significant new spending on programs. That’s significantly less than the April budget forecast of $52.8 billion. Kevin Page, president and CEO of the Institute for Fiscal Studies and Democracy at the University of Ottawa, told CBC it’s “remarkable” that the deficit has come down so quickly given how bad the country’s fiscal picture was just two years ago. But Yves Giroux, the current PBO, has said the central bank’s rate hikes to tame the risk of inflation could push Canada into recession. A recession could blow a hole in Ottawa’s fiscal picture. Bartlett agrees – predicting a recession for Canada next year as higher interest rates work their way through the economy and reduce personal and business spending. “There is a lot to be positive about in the very short term, but, ultimately, we think the economy will weaken next year and beyond. Budget deficits are likely to rise again,” Bartlett said.
