MNI POLICY: Canada to Restore Fiscal Anchor as Economy Firms

Canadian Finance Minister Chrystia Freeland said Wednesday she intends to restore a fiscal "anchor" as the economy recovers, but for now she will press ahead with record deficits that save money in the long term by boosting employment and growth.

Freeland declined to say when fiscal goals that earlier included deficits in dollar terms or a share of GDP will be restored during her speech. Rock-bottom interest rates and a low debt burden before Covid-19 make the red ink affordable, and the government has a moral obligation to get people back to work, she said.

"The risks of fiscal inaction outweigh the risks of fiscal action. Doing too little is more dangerous and potentially more costly," Freeland said. She also said fiscal policy must do more with monetary policy running out of firepower, speaking hours after the BOC held a 0.25% rate and pledged continued QE.

Canada is running into the longest period since its founding in 1967 without a budget, and since an informal update in July putting the deficit at a record CAD343 billion has added tens of billions worth of programs. The IMF says Canada's deficit as a share of GDP is the highest among advanced economies, though even at around 20% it's still shy of an all-time record set during World War II.

Opposition parties that must support the Liberal government's budget to avoid a snap election have shown little objection to near-term deficits, and neither have global investors who have pushed yields to record lows. Business groups have told MNI the lack of an anchor hurts confidence and some of the spending has missed the mark on helping pay rent and wages .

MEANINGFUL INVESTMENT

With the Bank of Canada saying Wednesday the economy won't return to full output until sometime in 2023, Freeland's message suggests a big deficit next year too.

"We will need to provide meaningful investment to build our way out of the coronavirus recession, and to ensure our economy comes roaring back, stronger than before," Freeland said. "Our fiscally expansive approach to fighting the coronavirus cannot and will not be infinite."

Deflation and stagnation are a bigger risk today than the high inflation and interest rates of the 1990s that pushed Canada into a deficit crisis, she said. Canada doesn't believe in any "fling" with Modern Monetary Theory on deficits, and the fiscal rules will come before any "lash" from investors heading for the exit, she said.

"We will resume the longstanding, time tested Canadian approach with fiscal guardrails and fiscal anchors that preceded the pandemic," she said.