We’re about to find out just how solid Chrystia Freeland’s “fiscal guardrails” really are.
The Deputy Prime Minister and Finance Minister introduced the country to that term a little over a year ago, in last fall’s economic and fiscal update. It describes a set of economic indicators, primarily from the labour market, that Ms. Freeland said would guide her government on when to shut off the taps on the flow of government spending aimed at supporting the economy, workers and businesses through the COVID-19 crisis.
“Fiscal guardrails will help us establish when the stimulus will be wound down,” Ms. Freeland said in her address to the House of Commons at the time.
“These data-driven triggers will tell us when the job of building back from the COVID-19 recession is accomplished, and we can bring one-off stimulus spending to an end. When the economy has recovered, the time-limited stimulus will be withdrawn and Canada will resume its long-standing, prudent and responsible fiscal path, based on a long-term fiscal anchor, which we will outline when the economy is more stable.”
As she approaches a new fall update on Tuesday, those words will be put to the test. It appears the key labour-market indicators on which the government has focused are bumping up against those guardrails. We’re going to find out if the government was serious about using those economic signals to put its stimulus genie back in the bottle, and if it’s prepared to commit to the next steps and re-establish longer-term fiscal discipline.
While Ms. Freeland and her colleagues have never spelled out the finer details of these fiscal guardrails, they have provided us with enough to have a pretty good idea of the construction materials. Last April’s budget identified several key labour market indicators, with the employment rate, hours worked, and the unemployment rate as the primary guides. Charts illustrated that these indicators remained considerably weaker than their pre-pandemic levels.
Today? The employment rate and total hours worked have exceeded their level of February, 2020, the last full month before the pandemic lockdowns. Unemployment, at 6 per cent in November, is still slightly above the pre-COVID level of 5.7 per cent, but remember that unemployment was near four-decade lows in the months before the pandemic.
By the government’s own key measures, the labour market looks either fully recovered or very close. Yet in testimony to the House of Commons Standing Committee on Finance last week, Ms. Freeland continued to talk about the labour recovery as unfinished work.
“If you say to me today, what is my core thing I’m the most worried about ... we can’t let COVID get ahold of us again ... but the second thing I’m the most worried about is getting jobs back.”
No doubt that’s good politics. Parties of all stripes figured out long ago that jobs are the one thing in the economy to which pretty much every voter can relate.
But it also flies in the face of the very numbers Ms. Freeland identified as setting the limits for the government’s stimulus spending. The jobs are back. The fiscal guardrails of her own making are telling her to steer the fiscal ship in another direction.
Of course, a great deal of the government’s pandemic stimulus efforts have already been withdrawn as that labour recovery has emerged, claims for those benefits have subsided, and some of the biggest and most costly programs have expired.
Still, as my colleague Patrick Brethour writes, much of the $100-billion stimulus package in last spring’s budget was made up of items that were, in reality, longer-term spending commitments rather than time-limited supports. (For example, the government’s national affordable childcare plan is part of that stimulus plan.)
There’s no reason the government shouldn’t use its recovery plan as an opportunity to tackle longer-term economic priorities (although, obviously, it would be preferable if it hadn’t dressed them up as part of a time-limited response to a crisis). But it needs to do so within some established boundaries of fiscal discipline. It must weigh its program ambitions against clearly defined fiscal targets and limits.
If Ms. Freeland intends to live up to her pledge of a year ago, then reaching the fiscal guardrails also means re-establishing just such boundaries – the “fiscal anchor.”
In the years before the pandemic, the Liberal government relied on the ratio of government debt to annual gross domestic product as this anchor, with a standard pledge to reduce debt-to-GDP (generally without getting too specific on targets). That went out the window in the pandemic, but in last spring’s budget, the government suggested it will return to this approach in the future.
“The government is committed to unwinding COVID-related deficits and reducing the federal debt as a share of the economy over the medium term,” it said.
But we’re now dropping that fiscal anchor into much deeper waters. In the 2019-2020 budget year, net-debt-to-GDP was 31 per cent; today, it’s more like 50 per cent. Simply saying “we’ll make it smaller” is a pretty toothless promise, and is a long way from anchoring fiscal policy in a determination to dig the country’s finances out of their pandemic hole.
If the promise of those fiscal guardrails is to mean anything, Ms. Freeland needs to move beyond them, to set meaningful anchors that will clearly define the path to taming the pandemic’s deficits and debts. Her government’s credibility as a fiscal manager depends on it. The time has arrived.
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