The Morning Brief – 02.18.21

By Bruce Carson


With vaccines starting to flow into Canada, it is time to look at the state of the Canadian economy and what might underpin the spring budget?

Finance Minister Freeland is currently involved in pre-budget consultations

Consultations mainly concern the spending side of the ledger

What about revenue coming into federal coffers?

It seems that for the next while, the vaccine shortages experienced by Canadians may at least be alleviated to a certain extent and it should be time to start looking ahead to the spring and the first federal budget since March 19, 2019.

Deputy Prime Minister and Finance Minister Freeland has referred to the upcoming budget as “the most significant one in our lifetimes.” Time will tell whether that is a valid statement, but what is undeniably clear, it is the most significant budget during Freeland’s life time as finance minister.

Her ambition to move up the political ladder one rung is inextricably linked to this budget, its contents, the economic fortunes of this country coming out of the pandemic and how her efforts handling all of this are perceived.

Will she be regarded as someone who is serious about the country’s finances, willing to adopt a fiscal anchor and live within it, or will she be known as the free spending finance minister initiating programs and spending , just because she can, whether the country at this time needs them or not?

As it is still unclear and may not be for some time, as to when COVID-19 and its virulent variants will subside, a number of those canvassed in Peter Mazereeuw’s article in Monday’s Hill Times expressed caution as to how Canada’s fiscal future should be approached.

Mustafa Askari of the Institute of Fiscal Studies and Democracy at the University of Ottawa was quoted as saying “everything in this budget will be driven by COVID.” Former Liberal MP Joe Jordon, now with Bluesky Strategy believes the budget has moved from being a pre-election budget, spreading around spending to one which he calls “let’s prove we’re doing a good job budget.” He believes the idea of using the budget as a launching pad for an election is likely dead.”

Former Minister of Natural Resources Amarjeet Sohi now at ALAR Strategy Group believes Freeland will concentrate and frame the budget as focussing on “inclusive growth.” This would include money for child care, jobs, skills training and subsidies for carbon capture and storage.

In this Sohi may be right as Armine Yalnizyan has expressed, we are experiencing a ‘shesecession’ and money for childcare, creating spaces, and employing qualified workers is vital for an inclusive recovery to take place.

One major question is whether the $70 to $100 billion stimulus spending on “Build Back Better” is needed now, how much and for what or should it be parked until, Canada is clearly beyond COVID-19 and into the recovery phase?

David Parkinson of the Globe referred to Freeland’s recent meeting with leading economists and the focus on the stimulus pot. The tenor of the meeting was that the economy may not be ready for that much stimulus. The economists would like to see stimulus plans that support business investment and productivity.

Craig Wright, chief economist at RBC is quoted as saying in the “medium term we need to right size government spending.” The banks see growth at 5% in 2021 with a return to pre-COVID levels in 2022. At this point they see no need for three years of stimulus spending. Doug Porter of BMO is quoted as saying “we don’t believe the economy will need a whole lot of prodding by policy to get going.”

The caution is that too much spending could push inflation and interest rates higher. While the Governor of the Bank of Canada has promised to keep interest rates at the lower bound, an increase in inflation may force the Bank to move on rates which could affect the government’s future spending plans.

Parkinson quotes Jean-Francois Perrault of BNS as recommending that the government subsidize business investment, through matching grants reducing the cost of capital.

Focussing on enhancing productivity would help increase growth, as would spending on infrastructure and improved access to child care.

The IMF early this week said in a report that Canada must justify post pandemic stimulus spending and Canada needs a clear fiscal anchor. The report notes that the pandemic has exposed cracks in the social safety net, urging clear targets for support and stimulus.

It describes Canada’s efforts to deal with the pandemic as “timely, decisive and well-coordinated.” The plan to spend up to 4% of GDP over the next three years to support recovery needs much further justification. The IMF stated “while the government still has some fiscal space, the additional spending, if deemed unjustified could weaken the credibility of the fiscal framework.”

The C.D. Howe Institute’s Fiscal and Tax Working Group, co-chaired by John Manley released its report on the budget yesterday recommending that Canada focus on tracing and rapid testing and vaccines in order to get the economy through the pandemic. The government should think carefully on providing additional stimulus. The theory is that when the pandemic subsides, stimulus won’t be needed.

However investments in productivity enhancement, building jobs of the future and digital infrastructure are supported.

And a fiscal anchor needs to be restored.

In all of these discussions the focus is on spending, but where will revenues come from as we move out of the pandemic with an ever-weakened energy sector?

More on this next week as we move closer to budget day; what are the social programs that need to be developed to fix the cracks exposed by the pandemic? This should provide an opportunity for the new leader of the Green Party, Annamie Paul.

To Come

  • The PBO releases two costing notes
February 19
  • G7 virtual meeting hosted by the UK
  • Retail trade numbers for December to be released
February 23
  • Bank of Canada Governor Macklem delivers a speech to the Chambers of Commerce in Edmonton and Calgary

The Morning Brief returns on Wednesday, February 24.

– BC