Mark Carney is the former governor of the Bank of Canada and the Bank of England.
During these past few weeks our gaze has often been riveted by events in the U.K. British spectacles hold lessons about how Canadians can prosper in a risky world.
In the U.K., global challenges of inflation and interest rates are being reinforced by Brexit. With the loss of seamless access to its largest market, U.K. exports have stalled, and investment has flatlined. Average real wages are still below their level in 2007. Before the referendum was called, the U.K. economy was 90 per cent the size of Germany’s. Today it is 70 per cent.
This is the context for the recent U.K. “mini budget.” It had a clear, laudable objective: to double the U.K.’s trend rate of growth to 2.5 per cent. The budget contained a mixture of measures: support for U.K. households ravaged by the energy crisis, a big cut in income taxes for the highest earners, a huge reduction in corporate taxes, the removal of a cap on bankers’ bonuses and promises of deregulation.
The reaction was swift and negative. The pound fell sharply, flirting with all-time lows. Interest rates spiked savagely, causing the suspension of new mortgages by banks and an emergency intervention by the Bank of England.
Why? And what are the lessons for Canada?
First, the market reaction underscores the tough new macro environment: volatile inflation, higher interest rates, and the sharp repricing of risk. Sound money and credible policies will be rewarded. Mistakes will be punished. No government will be exempt.
Second, it is counterproductive for fiscal and monetary policy to work at cross purposes. The U.K. budget is highly stimulative at a time when its economy is at full employment, inflation is in double digits, and the Bank of England is tightening policy. When one foot is on the brakes, it’s foolish for the other to stomp on the gas.
And Canadians know that when the road is icy, it can be downright dangerous. The Bank of Canada has been clear that further interest rate increases are needed to quell inflation. While governments should provide targeted relief to those Canadians most affected by inflation, this is a time to reduce deficits, not grow them.
Third, the U.K. budget delayed the tough choices to an (unspecified) future date, reducing its growth plan to a 1980s trickle-down strategy that won’t build a 21st-century economy.
Canadian governments cannot bank on the current revenue windfalls from higher commodity prices lasting. They should expect interest rates to rise further. To drive jobs and growth, spending discipline must be matched by strategic investments, smart regulation and better execution.
Fourth, the U.K. budget process undercut its institutions. The government refused to have its independent budget watchdog produce a forecast. The civil service was disparaged. The central bank attacked. This is a familiar pattern of expertise derided and experience disdained. But some truths, such as gravity, budget constraints and the value of transparency, can’t be ignored.
Canada has a strong, expert central bank. It should be held to account, not replaced by a crypto algorithm. Our Parliamentary Budget Office must regularly assess fiscal sustainability. Government programs should have clear targets and robust accountability.
Finally, the U.K. budget failed the imperative of inclusive growth. The majority of the tax cuts were set to accrue to the richest – an inequality that will grow with expected future cuts to benefits and services. After intense pushback, the U.K. government backed down on the tax cuts for the rich. Values matter. Canadians know there is no dynamism without solidarity. Our focus must be a better Canada for all.
With trade agreements with the U.S., Mexico, the EU and much of Asia, we are well positioned to bring global production and high-paying jobs to Canada. We can build sustainable solutions to global energy security. And with the right support, Canadian workers can seize the benefits of the digital and sustainable revolutions.
But to get there, we need a transformation of economic policy. That includes urgent federal-provincial collaboration to build a clean electricity grid by 2035. It means comprehensive tax reform to favour skills development and business investment. It requires bold new approaches so our colleges, institutes and universities provide mid-career training for every Canadian who wants it. It demands a financial system that supports an energy transition that seizes our full potential as an energy superpower.
People are facing deep anxieties about their bills, their homes and their kids’ futures. Some amplify those worries, promoting slogans that are simple, seductive and wrong. But British spectacles show that, in a rapidly changing world, institutions matter, and partial solutions fail. By working together, not dividing each other, by building not cutting, Canadians can turn anxiety into true prosperity for all.