There will be damage and scarring to the Canadian economy: Former BoC governor
Former Bank of Canada Governor Stephen Poloz said the worst thing that could happen to the Canadian economy during the COVID-19 pandemic is for the federal government to put the brakes on its virus-related spending spree.
“My biggest risk is we get 'Wave Three' and more, and for that reason maybe governments lose faith in the model and they have to constrain their spending. That would be my biggest concern, but right now, I’m feeling more optimistic given the vaccines,” he said.
While Canada entered the pandemic with an economy that Poloz described as “the best shape it’s been in for a long time,” data from Finance Canada shows the government’s support measures relative to GDP were among the highest across G7 countries.
But Poloz said it’s because of the targeted government aid and temporary measures like mortgage payment deferrals that Canadians have been “well-armed” through the pandemic.
“It boosted their savings quite a lot and at the same time they’re actually spending more,” he said. “So we have a very lively consumer with pent-up demand.”
He acknowledged there has been some permanent loss of demand and damage done to the economy because of the pandemic, but added the government appears to be thinking differently about fiscal policy.
“It sounds like they’re focusing a lot more on what we call 'structural’ policies or investments. The first thing you think of is infrastructure. For example, you do a big piece of infrastructure and it serves us for 30, 40 or 50 years and it adds to the productivity of the economy,” he said.
“Anything that comes along that can tilt upwards the long-term growth trend of the economy will be really timely at this stage.”
Poloz said sustainability will be key when it comes to Canada’s ballooning debt.
“The rate of growth in the economy needs to exceed the rate of interest you must pay on the debt. Provided it does so, the stock of debt will shrink as a share of the economy while they service the debt. And today, debt service is quite inexpensive,” he said.