MNI INTERVIEW: Markets May Turn on Anchorless Canada-Ex FinMin

Canada's government bonds and dollar are vulnerable to a loss of global investor confidence from unchecked deficits and central bank debt purchases, former finance minister John Manley told MNI.

Chrystia Freeland, finance minister since the departure of Bill Morneau amid reports of a rift with Prime Minister Justin Trudeau over a record CAD343 billion deficit, needs to think about restoring abandoned "fiscal anchors" soon, Manley said in an interview.

"There needs to be an anchor, there needs to be some reference point to fiscal performance," he said, adding that targets must be established as soon as the immediate pandemic emergency is dealt with.

"Everyone thinks every new emergency is different from the last one. I don't think so, I think that there are fundamental principles involved, and if you don't show discipline, then market sentiment can change in a heartbeat."

An anchor could restore the plan to hold down the debt-to-GDP ratio abandoned by the government, or cap program spending, said Manley, echoing a view also expressed by a shadow council which he presides and is organized by the CD Howe think-tank.

MARKET CONFIDENCE

While the Liberal government's debt ratio goal may not have been "tough enough," Manley said "at least it was a framework that it could be held to account for." Targeting spending directly may work because "most of your program spending is directly controllable and it can be an area where the government exercises more fiscal discipline."

The public along with markets could lose faith in a government seen as losing control of public finances, Manley said. Canada struggled to raise foreign bond sales during a 1990s deficit spiral.

"In the current circumstances, I think there was a strong appetite to see the government protect the population from the coronavirus," he said. But he added: "When we are coming out of Covid there needs to be a commitment to a framework, it needs to be clear and understandable."

The government will present renewed economic plans in a "Throne Speech" when parliament reopens on Sept. 23, and Trudeau has already said these will focus on social spending and fighting Covid-19.

BANK OF CANADA RISKS

Manley also pointed to risks from the Bank of Canada's government debt purchases. The BOC will buy at least CAD5 billion a week of federal bonds until the recovery is well underway, a plan Governor Tiff Macklem said last week can be calibrated to the needs of the economy after its initial use to unfreeze credit markets.

"The Bank of Canada by buying the debt is really letting go of some of the controls around spending," Manley said. "The risk is that the markets lose confidence in the value of your currency."

Freeland and other ministers have pointed to the Canadian dollar's gain in recent weeks and low borrowing costs as a sign of market confidence. Manley, who served as a Liberal finance minister and deputy prime minister for parts of 2002 and 2003, suggested that Freeland may have to stand up to Trudeau.

"You still fundamentally as finance minister have to be the one that says no, and sometimes you have to say no to the prime minister," he said. Asked if that is easy, he said: "It's not. Just ask Mr. Morneau."

"If you are borrowing to make the economy more productive, if you are laying the basis for future growth, then markets will forgive that, they understand that. But if you are streaming programs that are going to continue to drain the public finances, but without building the economic capacity to fund them, then markets are going to lose confidence in you," Manley said.