Ottawa has been a good student with its strong aid policies during the pandemic. It intends to continue to do the same, this time by intervening as little as possible in the face of inflation.
We could see a total reversal of the situation. When the COVID-9 pandemic hit, the federal government did not hesitate to deploy extraordinary and massive measures to help households and businesses facing an economy put on hold to curb the spread of the virus. virus. This effort had also been expensive, helping to blow up its deficit from around 25 billion in 2019 to almost 330 billion the following year.
It paid off, however, Finance Minister Chrystia Freeland said Thursday in her Fall Economic Statement. Not only did the Canadian economy experience its fastest recovery of the last three recessions, but it still posted, during the first half of the year, growth (3.2% at an annualized rate) by far the strongest of the countries of the G7. This economic strength is particularly striking on the employment side, with 400,000 more Canadians than before the pandemic working and an unemployment rate in September (5.2%) very close to its historic low.
Another problem, another solution
But there. The problem today is not there. It is on the side of inflation, which weighs on household purchasing power and forces central banks to raise their interest rates at a run to curb demand from consumers and businesses, even if it means plunging the economy in recession.
Here again, Canada is doing better than most developed countries, with inflation falling from 8.1% to 6.9% since June. But we are still far from the Bank of Canada’s 2% target. So Canadians are not done with the pain, both in terms of their purchasing power and their economy.
It is understandable, in this context, that many voices may be calling for help from Ottawa to cushion the shock of rising prices, especially since it would have the means to do so, according to its economic update of yesterday.
Taking advantage of the good performance of the economy and incomes inflated by inflation, the deficit that he forecast in April for the current budget year would have melted by more than half, from 53 billion to only 23 billion. At this rate, estimated the chorus of economists consulted by the Department of Finance in September, it should have returned to balanced budgets in 2026-2027, and the net debt of the federal government as a proportion of the economy should have returned to what it was before the pandemic at the turn of 2030.
Didn’t the International Monetary Fund itself say last month that Canada is one of the countries with the soundest public finances? It’s true. But he also said that the last thing we need today is governments that—through tax cuts, price controls, and other general measures—keep the inflationary fire that central banks are trying to put out.
Instead, the IMF called for limited and targeted support for the most vulnerable people. It also encouraged countries to accelerate their preparation for the major economic challenges ahead, including the green shift.
A good student, Chrystia Freeland did just that on Thursday. It confined itself to adding a few targeted aid measures to those which had already been announced. She also promised a few additional billions for the transition to carbon neutrality, but which will come mainly in the coming years. More than half of the unexpected budgetary gains will remain devoted to deficit reduction.
Uncertain future
“While the Bank of Canada fights inflation, we will not complicate its job,” said the Minister. We are compassionate, and we are also responsible. »
“And careful”, could also have added Chrystia Freeland. Indeed, the situation is changing quickly, and generally not improving, explain its officials. So much so that the September private sector forecasts on which their Economic Statement is based could well have already been exceeded.
So, if the central banks’ war on inflation turns out to be a little longer than expected, Canada may ultimately not be able to avoid a “mild recession” in early 2023 that would result in a contraction of 1.6 % of gross domestic product and a rise in unemployment to 6.9%. This “pessimistic scenario” would be much less serious than during the financial crisis of 2008-2009 (-4.4% of GDP and 8.7% unemployment), but it would cause the deficits to start rising again in the coming years.