Ramping up spending in the face of the coronavirus pandemic was the easy part. It required no ideological leap of faith for Bill Morneau to go all-in on fiscal stimulus, despite concerns about how so much debt might mortgage the country’s future.
Mr. Morneau will not be around for the hard part, however. With his Monday resignation as finance minister, it will fall to Chrystia Freeland to convince financial markets that Ottawa has a serious plan to prevent a record deficit from becoming the new normal.
Mr. Morneau’s apparent discomfort with Prime Minister Justin Trudeau’s desire to seize on the crisis to chart an even more interventionist course for the federal government explains his resignation as much as the WE Charity mess he got himself into. Although the WE scandal served as a convenient pretext for Mr. Trudeau to throw Mr. Morneau overboard, it had become clear that the two men had been clashing over policy matters, too.
And that is the most unsettling aspect of Mr. Morneau’s resignation. He was a rare voice of fiscal caution around a cabinet table of progressives for whom debt and deficits are an afterthought. His departure leaves a massive hole at the centre of power.
Had that hole been filled by former Bank of Canada governor Mark Carney, as many on Bay Street had hoped, Mr. Morneau’s departure would be no big deal. Most domestic and foreign investment analysts who cover Canada would have hailed Mr. Carney’s arrival as a good news story. The addition to cabinet of a former governor of the Bank of England would have offset concerns of fiscal policy gone adrift.
For all her political talent, Ms. Freeland does not have a comparable profile. Her willingness to stand steadfastly by Mr. Trudeau through the SNC-Lavalin and WE scandals, which have shed light on the Prime Minister’s ethical blind spot, could make investors more than a little uncomfortable about her closeness to her boss.
She will need to make clear early and often that she is not a rubber stamp for fiscal policy concocted in the Prime Minister’s Office.
That will not be easy. Mr. Morneau essentially saw his responsibility for fiscal policy pulled out from under him as the PMO consistently overruled him on the roll-out of income support programs adopted to deal with the pandemic shutdowns. He had favoured a less generous Canada Emergency Response Benefit and Canada Emergency Wage Subsidy. No one else around the cabinet table appears to have had his back as he warned about the dangers of going so big.
With Mr. Morneau’s departure and Mr. Carney’s non-arrival, the cabinet now consists almost entirely of big government activists with an abiding faith in the visible hand of the state and a marked distrust of the invisible hand of the market. Any ambiguity about the ideological orientations of this government has been eradicated.
For now, markets continue to surf on the extraordinary monetary stimulus that the Bank of Canada has injected into the economy since the pandemic struck. The federal debt – which will surpass the $1-trillion mark on this year’s projected deficit of $343-billion – is not a problem as long as the central bank keeps printing money to buy federal bonds.
Markets, however, have a funny way of turning on countries such as Canada when they least expect it. We learned that lesson in the 1990s – not that this government possesses any institutional memory of the painful reckoning Canada experienced back then.
Whatever specific policy initiatives emerge from next month’s cabinet retreat, which will set the stage for a fall throne speech, it is safe to assume they will not include a plan to return to a balanced budget. That might be bad enough were it not for all the Liberals who advocate for a Canadian version of the U.S. left’s Green New Deal or for a state-led industrial policy modelled along the lines of presumptive Democratic presidential nominee Joe Biden’s Build Back Better plan.
The difference is that the Green New Deal and Build Back Better plans are campaign pitches, rather than serious policy proposals. Mr. Trudeau’s minority government can pass just about any postpandemic economic plan it wants as long it buys off a New Democratic Party that is terrified of facing an election that pits the activist Liberals against the austerity-minded Tories.
Ms. Freeland may find herself having to decide which comes first: fealty to her boss, or credibility with the credit-rating agencies. It is unlikely she can have it both ways.
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