Inflation has become a chilling worry. The economy is recovering faster than expected. So will Justin Trudeau’s Liberal government change tack on fiscal policy and pull back on the $101-billion stimulus announced in its April budget? Or its $78-billion in election promises?
It’s not in their political DNA.
This is a government that always talks about stimulating the economy, including the vulnerable in it, and having people’s backs with public funds – not about cooling off demand, pulling back, or tightening belts.
That won’t change dramatically when Finance Minister Chrystia Freeland delivers the fall economic statement on Tuesday. The Liberals aren’t planning a sea change in next spring’s budget, either.
Many economists argue Ms. Freeland should cut back a chunk of the stimulus package announced in April because of strong job and economic growth and inflation running at the highest rate in years. Don’t expect that.
The revenue and deficit projections in Tuesday’s statement will look presumably better than in April – inflation actually helps that in the short term – but don’t take that as the signal the Liberal government will shift gears to focus on balancing budgets.
That’s not the way they have done things in six years in power. When deficit projections come in better than previously forecast, as they often did, the Liberal government saw that as creating room to spend more.
On Tuesday, Ms. Freeland will be able to use lower deficit forecasts to argue there is room for additional spending – some now, in Tuesday’s economic statement, including more measures to deal with the COVID-19 pandemic, and more to come in next spring’s budget.
The Finance Minister will have to talk about inflation, but the Liberals have so far largely cast that as an issue of affordability, and argued that subsidized child care and measures aimed at alleviating high housing costs will ease the pain.
There is a political clamour – from left and right, as well as provincial and municipal administrations – for Ottawa to do something. So Ms. Freeland might signal action is coming on election promises to institute a house-flipping tax and curb foreign ownership of residential housing.
But the big picture, the plan to spend huge sums on a recovery plan and keep adding more, isn’t going to be hacked back.
There are plenty of people telling them they should, and not only their Conservative political opponents.
Economists have suggested the government should at least take their foot off the gas fuelling demand.
Robert Asselin, senior vice-president of the Business Council of Canada and former policy adviser to Ms. Freeland’s predecessor, Bill Morneau, recently penned an article arguing that the Liberals’ huge recovery spending should be rejigged because the economy is going strong and inflation is now the greater concern – he warned against “fiscal complacency.”
McGill University economist Chris Ragan said he didn’t think lopping $20-billion off the $100-billion recovery plan would have much of an impact on inflation, but there is still another reason to do it – because it would save $20-billion that is not needed for economic recovery.
The Liberals see that the other way around. If cutting back $20-billion won’t cool inflation, why do it? Inflation is still largely blamed on supply chain issues, and still forecast to be a problem that will ease in a year. They argue that many of the spending measures in their recovery plan are aimed either at green-economy transition or aiding vulnerable people who will need it more because of inflation, not less. Full speed ahead.
The Liberal approach to the national debt hasn’t really changed, either – even though it is now far higher than it was before the pandemic.
Before 2020, Mr. Trudeau’s Liberals argued there was room to spend because the ratio of the federal debt to the size of the economy, at roughly 30 per cent of GDP, was not increased significantly – so things were under control. After the massive pandemic deficits, the Liberals argue things will be fine because the debt ratio won’t go up in the future – only now, it is roughly 50 per cent of GDP.
They could, with better revenue figures, suddenly present a forecast for balancing the budget in coming years – disarming the Conservatives’ politically. But then they’d open themselves up to criticisms from the NDP that they are imposing austerity. And under Mr. Trudeau, the Liberals have leaned to competing with the NDP for voters. The Liberal approach to fiscal policy will still be the Liberal approach.
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