In the current economic circumstances, two very specific tests awaited Minister Chrystia Freeland in the context of the presentation of her fall economic statement: reassuring the financial markets by showing them that the government understands the importance of budgetary prudence and offering a response to the muscular industrial strategy of the Americans. In both cases, we are dangerously close to the pass mark. We clearly expected better.
Posted yesterday at 10:00 a.m.
On the budgetary prudence that the Minister has done his utmost to promote in the public arena over the past few weeks, there is a considerable gap between the rhetoric and the reality reflected in the economic statement.
Of the 30 billion in additional revenue for the 2022-2023 fiscal year (30 billion, that’s not nothing!), the minister will spend almost half (45%) for the current fiscal year. We will come back for caution.
What’s more, the proportion of federal spending as a proportion of GDP is now well anchored above 16% for the next five years, a ratio that the federal government reached only during the financial crisis of 2008-2009 and in the early 1990s, a painful episode which had led to a drastic recovery of public finances by the former Minister of Finance Paul Martin. This is without taking into account the future expenses in health, defense, etc.
In terms of economic forecasts, the statement is imbued with joviality. He forecasts neither a major recession nor a sustained rise in interest rates over the next few years. In fact, the projection of real GDP growth over the next five years is on average more generous than what we have had over the past 20 years! In defense of the government, the forecasts are made by private sector economists, the same ones who told us that inflation would be transitory!
Pan American issue
In his press conference on Wednesday, the governor of the American central bank, Jerome Powell, was unequivocal: to bring such high inflation under control, the key rate will almost certainly have to exceed 5% in the United States. This is one percentage point more than was thought necessary just a few weeks ago.
In both the United States and Canada, proponents of the soft landing scenario (soft-landing) are becoming increasingly rare: bringing such persistent inflation back to its 1% to 3% range will not be smooth.
Those who think that we must tolerate higher inflation to avoid a recession have a duty to explain why the considerable weakening of the purchasing power of Canadians in relation to their income is a desirable long-term economic objective. .
Uncertain future
Ultimately, the clouds are rapidly building up on the economic horizon. The risks remain enormous and the federal government’s fiscal room for maneuver has evaporated. For the next few years, it will no longer be able to count on economic growth exceeding the interest rates that the financial markets will require of it to refinance its debt. This will have the effect of increasing the cost of financing its debt considerably.
The Minister’s second test was to improve Canada’s economic competitiveness. With l’Inflation Reduction Act and the Chips and Science Act (with a combined value of around US$460 billion), no one doubts the robustness of US industrial strategy. Minister Freeland has the merit of recognizing the impact on our economic competitiveness.
In Thursday’s statement, she lays the groundwork for Canada’s response by introducing two new tax credits targeted at clean technology and hydrogen. She tells us that additional measures will come in the next budget. Or, you have to give the runner a chance.
It has to be said, however, that for the past few budgets, the Trudeau government has been dispersing itself by creating new funds, structures, agencies and dispersing billions here and there. It is hard to see a credible and well-crafted industrial strategy in specific high-tech sectors, with clear instruments to improve our competitiveness.
In this economic statement, there is an annoying sense of non-urgency. With such a fragile and unstable economic environment, we would have liked to see the government more concerned about its growing blind spots.