Fiscal targets will come, but emergency spending must stay for now, Freeland says

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Finance Minister Chrystia Freeland says the federal government’s recovery plan will deal with the debt and deficits built up during the COVID-19 pandemic, but also warned that it is too soon to scale back emergency spending.

In a virtual speech to the Toronto Global Forum on Wednesday, Ms. Freeland outlined the government’s thinking ahead of an economic and fiscal update.

Ms. Freeland did not announce any new fiscal targets or policy measures. Instead, the minister explained why further deficit spending is needed, and that the government believes it is affordable because of historically low interest rates.

She aimed to assure Canadians and businesses that emergency support programs will continue, and acknowledged concerns that deficit spending must be temporary.

“Our citizens and our companies are suffering through no fault of their own. For a government to abandon them at a time like this would be monstrous,” she said. “And it wouldn’t be just heartless. It would be an economic mistake. That is because our eventual recovery will be faster and more complete in direct proportion to how much we limit the economic scarring caused by the coronavirus recession.”

Prime Minister Justin Trudeau indicated earlier this week that the fall update would not include a fiscal anchor. The Liberal government abandoned earlier fiscal targets, such as balancing the budget by 2019 or keeping the federal debt-to-GDP ratio on a downward trend.

Ms. Freeland said on Wednesday that new goals will come in time, as part of a recovery plan that will focus on a green economy, innovation and economic fairness.

“As that occurs, we will resume the long-standing, time-tested Canadian approach, with fiscal guardrails and fiscal anchors, that preceded this pandemic,” she said.

Business Council of Canada president Goldy Hyder was largely supportive of the message, especially of Ms. Freeland’s comments that emergency measures will be temporary.

“The direction in which she indicated she is heading, I would say, is welcome,” he said.

Mr. Hyder also expressed concern that the government appeared to suggest the focus on an economic recovery would come after the pandemic. The council released a report on Wednesday saying a plan is needed now to grow the economy through skilled immigration, training and other business-friendly reforms. The report warned that Canada’s elevated debt-to-GDP levels will impose “serious constraints” on the government’s future fiscal capacity. Mr. Hyder also noted the speech did not directly address the fact that the crisis is urgent for some sectors, such as aviation, retail and tourism. He also took issue with Ms. Freeland’s assertion that growing debt is less of a concern because of low interest rates.

“The idea that … because we have low interest rates, nobody needs to worry about anything, that is not an economic policy,” he said. “We need more in the economic statement. A specific growth plan, and we do believe it needs to be rooted in some form of fiscal anchor.”

Former BlackBerry executive Jim Balsillie also said a federal growth plan can’t wait.

Earlier this week, more than 130 Canadian tech executives signed a letter from the Council of Canadian Innovators, which Mr. Balsillie chairs, asking the federal government to champion domestic innovation to better position the economy for recovery.

“When you’re the finance minister, you have to think of revenues and expenses in tandem,” he said in an interview. Although the expenditures are “very necessary,” he added, the other side of the equation is missing: “We’re way overdue for a prosperity strategy. These need to be done in parallel, not in sequence.”

Canadian Federation of Independent Business president Dan Kelly praised the minister’s focus on supporting businesses to limit bankruptcies.

“I think many business owners will be heartened to hear that the minister is looking at the COVID-related business support programs from a pragmatic perspective, with the goal that as many businesses as possible make it across the finish line,” he said.

Economists were watching the speech closely for signs of how the government will reintroduce a fiscal anchor. The most important hint, according to CIBC Capital Markets chief economist Avery Shenfeld, was a reference to the work of former International Monetary Fund chief economist Olivier Blanchard, who says the high interest rates in the 1980s and 1990s that exceeded growth rates were a historical anomaly. That view supports maintaining higher government borrowing and setting a fiscal anchor according to how much it costs to service debt.

“The government does seem to be leaning towards using interest payments as a share of GDP or government revenues as an important fiscal anchor. And that is in line with some of the thinking of economists like Olivier Blanchard, who she actually quotes in the speech,” Mr. Shenfeld said.

At the same time, the speech signals to the financial community that government spending would not be endless, said Doug Porter, chief economist with Bank of Montreal.

“While I think many reasonable people can be quite concerned about the level of deficits and the growth rate of the debt, I think it is at least reassuring to so-called fiscal hawks that she did come out and say there are no blank cheques, there are no free lunches. I actually think that’s a pretty important thing by itself,” he said.

The Liberals have not tabled a formal budget since March, 2019, before they were re-elected with a minority government. The Finance Department has also stopped releasing a biweekly update on the cost of COVID-19 programs.

Conservative MP and finance critic Pierre Poilievre said the minister’s speech fell short in terms of addressing the deficit and Parliament’s concern about financial transparency.

“It’s been almost two years without a budget,” he said. “They don’t know how big the deficit is. They don’t know how much money they’re spending. All they know is that they need to spend more.”

The last full federal fiscal update was delivered in December, 2019. It projected a deficit of $28.1-billion in the fiscal year that started on April 1, 2020, and said the federal debt as a percentage of GDP would peak at 31 per cent before declining slightly over the first half of the decade.

Ms. Freeland’s predecessor, Bill Morneau, released a fiscal “snapshot” in July that said the 2020-21 deficit would be $343.2-billion. Since then, the federal government has announced further spending. However, economic forecasts have also improved, which should help the federal bottom line by increasing federal revenues.

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