In laying out her vision of her government’s fiscal responsibilities in the current crisis, Finance Minister Chrystia Freeland seemed determined not to repeat the mistakes of Stephen Harper’s government after the 2008-2009 recession. In many ways, she’s absolutely right.
But the thing is, not everything the Harper government did was a mistake. And in vowing to avoid one important misstep, Ms. Freeland is irrationally forgoing one of Mr. Harper’s most effective tools – a commitment to a strong fiscal target (or “anchor,” as fiscal policy wonks often call it). Without it, her task will be more difficult.
Ms. Freeland’s speech to the Toronto Global Forum last Wednesday was a spirited defence of continued heavy, deficit-financed government spending – a principled call to keep the taps open and the money flowing, lest Ottawa leave the economy stuck long term in the deep ditch dug by the COVID-19 pandemic. She pointed out that many countries, including Canada, unwound their emergency spending packages too soon after the financial crisis and Great Recession of 2008-09.
Few economists today would disagree. Governments were too eager after that crisis to adopt austerity measures and wrestle their budgets back to normal; the withdrawal of public spending certainly prolonged what proved to be a very slow and painful recovery.
In Canada, the Harper government – committed to balancing the budget, both philosophically and through a key pledge of its election campaign – actually cut program spending by 2 per cent in 2010-11. At that point, unemployment was still about 2 percentage points above prerecession levels.
In the four years after that – as the recovery remained elusive, prone to what Bank of Canada governor Stephen Poloz famously coined “serial disappointment” – federal government expenditures grew by less than 1 per cent a year, not even keeping up with inflation.
It would be easy to look back and identify the Harper government’s balanced-budget commitment as being the root of the problem. Certainly, the ill-timed and zealous pursuit of it was, in retrospect, poor economic policy. But the target itself was actually one of Stephen Harper’s master strokes.
Let’s not forget that under a government with a near-religious belief in balanced budgets, beholden to a voter base that shared its fiscal doctrine, Canada went from annual budget surpluses to a $56-billion deficit at a blink of an eye when the global financial crisis demanded an urgent and dramatic response.
While pledging to balance the books, the Harper government accumulated nearly $160-billion in deficits over six years – winning an election in the midst. It was one of Mr. Harper’s greatest economic and political achievements that he was able to run large and necessary deficits while convincing the Canadian public that he was their champion of fiscal responsibility.
It wasn’t just political snake-oil peddling. The balanced-budget commitment gave the government cover to run those deficits because it never stopped talking about it, never lost sight of it. It measured its budget decisions against the goal. The commitment bought the government time and support to do what it had to do. Its biggest mistake was not trusting the cover and taking all the time it needed to get it right.
Ms. Freeland seems to believe that setting fiscal targets is somehow contradictory to committing to the pandemic-fighting task at hand. As if the second you identify where you want to take your fiscal balance down the road, you are implicitly starting to withdraw necessary stimulus. It defies logic, and it flies in the face of prudent fiscal and economic planning.
The Finance Minister argues that it’s too soon. Nonsense. The act-now-and-ask-questions-later moment passed months ago. We’ve had ample time to understand the economic impact and to tailor policy to it. There’s little justification to argue for panic-mode thinking when the panic is well off the boil.
Maybe it’s the image of an “anchor” – evoking something restraining the government in place, limiting its flexibility, pulling it back whenever it drifts away – that makes Ms. Freeland and her colleagues nervous. Fine. Let’s call it something else.
Let’s create a fiscal compass.
If Ms. Freeland isn’t prepared to set firm parameters on her government’s near-term spending, why not spell out clear economic criteria which, once met, will satisfy Ottawa that it’s time to turn down the fiscal tap? Why not lay out a clear timetable for removing stimulus, once the goals are achieved – whenever that might be?
Something like that would not only provide concrete economic objectives for the government’s pandemic-mode spending, but would buy the government vital credibility to pursue those objectives without constantly facing questions about its fiscal responsibility. It would back up Ms. Freeland’s assurances that fiscal discipline will eventually return with meaningful transparency and accountability.
Without it, all we have is Ms. Freeland’s “trust us, we’ll get there," with zero clarity about where and when “there” is. It’s not enough. It’s time for a fiscal compass.
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