One of the frustrating things about this week’s fall economic statement was that the federal government finally erected some barriers to contain its pandemic spending that has shown no bounds – and then kept us in the dark about where those barriers are.
But maybe we can shed some light. All we need is a good calculator, a decade of economic history and a bit of imagination.
Finance Minister Chrystia Freeland assured Canadians on Monday that Ottawa is establishing “fiscal guardrails” to guide the way to eventually reducing its massive stimulus spending. The government will rely on key labour-market indicators – unemployment, the employment rate (the percentage of the working-age population with a job) and hours worked – to determine when the economy is sufficiently back on its feet. The data will dictate when the government turns off the taps.
But exactly how much more recovery do we need in employment and hours to trigger the start of the stimulus unwinding? For that degree of detail, Ms. Freeland said, we’ll have to wait until the government is ready to lay out its postpandemic recovery plan in next spring’s budget. For now, we’ll just have to be satisfied that these guardrails exist, even if they’re, um, invisible. (Good thing Ms. Freeland isn’t Minister of Transport.)
At least we know what economic gauges will drive these decisions. Fortunately, we’re also only a decade or so removed from the last major economic crisis, providing a fairly recent experience from which to draw. Armed with these tools, perhaps we can surmise a few things about where the guardrails might appear.
First, let’s consider where these measures stand today. The unemployment rate in October was 8.9 per cent, up nearly 3.5 percentage points from prepandemic levels. The October employment rate was 59.4 per cent, down about 2.5 percentage points from before the crisis. Perhaps most significantly, total hours were down 6 per cent.
Now, let’s consider where these same indicators stood when then-prime minister Stephen Harper’s government began to withdraw its stimulus spending after the 2008-09 financial crisis – a pullback, economists generally agree, that proved in hindsight to be premature and that prolonged the subsequent recovery.
The Harper government’s stimulus package – $40-billion over two years, front-loaded to the first year – was essentially wrapped up by the June, 2011, budget; in the 2010-11 budget year, the government had already begun scaling back its spending, both in total and as a percentage of GDP.
At that point, the unemployment rate was 7.5 per cent – which would be a considerable improvement over today’s level, but still about 1.5 percentage points above where it stood before the crisis hit. The employment rate was nearly two percentage points below prerecession levels. Total hours worked were back within 1 per cent of where they had been before the financial crisis – although if you take into account growth of the labour force, it was probably down more like 3 per cent in real terms.
So, that’s a sense of what “too early” looks like.
Perhaps the Bank of Canada’s stimulus of that period might provide a more useful guide, given that its monetary policy has long been driven by the economic data, with the labour market being an important part of that.
The central bank began to reverse its deep cuts to interest rates in mid-2010, but was much less hasty than the federal government in unwinding stimulus. The bank kept its key rate at just 1 per cent for years afterward, and lowered rates again in 2015 in response to the oil price shock. Even when some signals suggested the economy was running near its full production capacity, the bank resisted raising rates for a time – arguing that the labour market continued to show slack.
When the bank finally began unwinding its stimulative rates in July, 2017, the unemployment rate had fallen to 6.3 per cent, just a tick above where it stood before the financial crisis hit. However, the employment rate was still two percentage points below its precrisis level, indicating there was still lots of untapped labour supply, as large numbers of potential workers had not returned to the workforce. Total hours had not kept up with labour force growth, another sign of remaining slack.
Taking these figures together, we can perhaps surmise, then, that 7 per cent might be a reasonable tipping point at which removal of extraordinary stimulus enters the conversation – provided it’s confirmed by some improvement in hours and the employment rate. There will still be plenty of fiscal and monetary stimulus in place even as the government begins easing off the gas pedal.
Frankly, the government might want to sit down with the Bank of Canada and ask for its input on this process. After all, the central bank has signalled that it, too, will be looking to the economic indicators for clear evidence of a healthy, sustained recovery before it starts to withdraw monetary stimulus – and the labour market will be central to that analysis. What’s more, the bank has much more experience, and expertise, in executing economic-data-driven stimulus adjustments. The government and its central bank co-ordinated last spring in implementing their stimulus plans; it may serve them well to co-ordinate their withdrawal.
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