May 11, 2021
Trudeau's deficit spending wins Poloz's praise as 'sustainable'
A stronger Canadian dollar is likely to persist in the quarters ahead: FX strategist
Justin Trudeau’s debt-financed spending plan earned a stamp of approval from at least one former Bank of Canada governor amid a simmering debate over whether the budget can propel long-term growth.
Stephen Poloz, whose term as the nation’s central bank chief ended last June, said in an interview that he believes the government produced a sustainable fiscal plan that addresses pandemic-related needs, while avoiding major new taxes.
Finance Minister Chrystia Freeland is also taking steps to improve Canada’s long-term economic outlook, and that will help the country pay down its debt in the future, Poloz said. Her debut budget, released last month, has plenty of new spending over the next few years for dozens of initiatives, but the funding is mostly temporary.
The deficit is expected to fall back to around 1 per cent of total output by 2025, with revenue steadying near pre-pandemic levels, though overall debt has been permanently shifted higher to about 50 per cent of gross domestic product. It was around 30% before Covid-19 hit.
“Some people say that’s not bringing down the debt fast enough in order to prepare ourselves for another major event. That to me is more of a political question,” Poloz said. “The minimum ingredients that one needs to have in a sustainable plan are present, and that was done without a meaningful increase in taxes of any kind.”
Poloz’s comments could improve the prospects for a budget that hasn’t been receiving high praise from other prominent former economic policy makers, amid worries that it lacks sufficient measures to promote sustained growth.
Mark Carney, the former governor at both the Bank of England and the Bank of Canada, described the Trudeau government’s spending plan as a “hybrid budget” that attempts to achieve multiple objectives, including a “start” on growth.
“What we are seeing in some other jurisdictions is that the focus is more squarely on the growth,” Carney said on an April 27 podcast hosted by political consultant David Herle.
David Dodge, Carney’s immediate predecessor at Canada’s central bank, also highlighted a lack of growth-focused initiatives in an interview that same week with the Globe and Mail newspaper.
Robert Asselin, a former top economic adviser in Trudeau’s government, described the new spending as “unfocused and unimaginative” in a commentary for the Hub, an online curator of news and analysis.
Poloz, who was Bank of Canada governor when the crisis hit, said he disagrees with characterizations of the budget as a massive expansion of the state, considering that the long-term revenue trend hasn’t been altered at about 15% of GDP.
“What I take a little bit of exception to is it’s being cast as this path-breaking move to big government,” Poloz said. “There is a conservatism around those numbers.”
One potential outcome from the higher debt could be a greater focus on growth-producing measures, Poloz said.
The former governor -- now a special adviser at the law firm Osler, Hoskin and Harcourt LLP -- lauded the budget for recommitting to removing internal trade restrictions among provinces, a longtime pet peeve of his. Poloz said he hopes the government will also be able to speed up its efforts to establish a national daycare system.
“My advice all along has been let’s focus on things that might add to economic growth, structural things, because that would bring our indebtedness down faster all by itself without raising taxes,” Poloz said.