This has been a big week for Canadian economic policy. Tuesday brought Finance Minister Bill Morneau's Fall Economic Statement, while this morning we had the Bank of Canada's scheduled rate announcement. The early takeaway here is that the stage is clearly set for fiscal and monetary policy to start pulling in different directions -- never a good thing.
For the past six months or so, Bank of Canada Governor Poloz has been claiming that the Bank's ultra-easy monetary stance has been the primary factor in the economy's surprisingly strong growth, currently the fastest among the G-7 nations. The Bank now believes that the economy is nearing full capacity, and hence decided to start removing stimulus during the summer.
Hold on there, says Minister Morneau: it's the Trudeau government's stimulus plan that's working, and because of that, the government will be "doubling down". Recall that during the election campaign of 2015, Justin Trudeau took what was seen as a considerable gamble in pledging the Liberals to introduce a fiscal stimulus program. The key word in the plan was "modest", which Trudeau indicated would mean deficits of no more than $10 billion (all figures in Canadian dollars) for no more than a couple of years.
Once safely in power, the Liberals moved quickly away from the "modest" part, announcing substantial spending plans financed by deficits of upwards of $20 billion and no firm plan for a return to balance. It is far from clear that the party would have been elected if it had specifically promised this during the campaign: the opposition parties would have been quick to remind Canadians just how painful it had been to escape the country's last fiscal morass in the 1990s.
Back in the spring of this year, Morneau estimated that the deficit for 2017 would reach $28 billion. Six months on the shortfall is estimated to reach less than $20 billion, thanks to the revenue boost resulting from unexpectedly strong GDP growth. Hence Morneau's assertion that his fiscal plan is working and his pledge to "double down". The Fall Statement includes a variety of measures aimed at the amorphous but much-loved "middle class", as well as a wide range of increases in program spending.
The opposition Tories are expressing alarm at what they see as a lack of fiscal discipline. In truth, the projections are not excessively worrisome. The growth projections, showing a significantly slower pace of expansion through 2018 and 2019, are in line with the Bank of Canada's. There is no target for a return to fiscal balance, but the deficit is projected to decline steadily from year to year. The Government's initial fiscal plan saw public debt rising by $100 billion in four years; now it will take seven years for it to grow that much. The public debt-GDP ratio will fall gradually.
All of that being said, it's hard to gainsay the fact that Morneau is giving up a lot of his room to manoeuvre here. In the event that the economy falls short of his expectations, the deficit may start to mount alarmingly, especially if the government tries to offset the slowdown through further stimulus measures.
And if the forecasts are correct and the economy does not slow down unduly? Then we would have a situation in which the Bank of Canada is gradually reducing monetary stimulus to avoid a resurgence in inflation, even as the government is continuing to stoke demand. As expected, the Bank left its overnight rate target unchanged at 1 percent today, but it continues to see the economy at or near full capacity, and hence warns that further reduction in monetary stimulus will still be needed.
It's been many years since we had monetary and fiscal policy in any kind of harmony. For much of the Stephen Harper era, the Bank of Canada was forced to adopt a cheap money policy because fiscal policy was inappropriately restrictive. We now seem to be going the other way: Trudeau and Morneau's open purse strings may force the Bank to tighten monetary policy faster than it would ideally like. Don't these guys talk to each other?
No comments:
Post a Comment