Economists raise inflation, spending concerns in private meeting with Freeland Friday

Private-sector economists raised concerns over inflation and the scale of federal government spending on Friday in a meeting with Finance Minister Chrystia Freeland as she prepares to release a fall fiscal update.

Several economists also said on Friday that the federal deficit for the current fiscal year appears likely to come in a bit below the $154.7-billion projected in the April budget, but uncertainties over the direction of the COVID-19 pandemic and potential new federal spending could alter that trend.

The Friday afternoon virtual meeting took place just hours after the release of the Finance Department’s monthly fiscal monitor report, which said the federal deficit stood at $68.6-billion at the halfway point of 2021-22.

The first-half trends suggest Ottawa’s deficit is roughly in line with the estimate in Ms. Freeland’s April budget, which said the deficit for the full year would be $154.7-billion, down from a projected $354.2-billion the previous year during the initial waves of COVID-19.

Scotiabank chief economist Jean-François Perrault said high inflation worldwide is creating economic uncertainty, and he urged the minister not to add to that by changing the Bank of Canada’s current monetary policy mandate, which is defined as aiming to keep inflation within a range of 1 per cent to 3 per cent. The government approves the mandate every five years, and the next renewal is due before the end of December.

As part of the renewal process, the bank is considering alternatives to the existing regime, including a dual mandate that would target full employment alongside price stability, and an average inflation targeting system intended to make up for periods of low inflation by aiming for higher inflation after recessions.

“My pitch was I don’t think they should change it, or if they were of a mind to change it, to push that decision back a year or two,” said Mr. Perrault, who has held senior positions at the Finance Department and Bank of Canada. “It’s just a risk I wouldn’t take.”

Mr. Perrault said he didn’t think Ms. Freeland could do much else to address inflation at this point, and he said he was not too concerned about the size of the deficit. But BMO chief economist Doug Porter - who also attended the private online gathering - said his message to the minister is that curbing federal spending could help ease inflation.

“I think at the margin there are some things fiscal policy can do, and that’s basically to take the foot off the accelerator. I think that would make a difference to a small degree, even here in Canada,” he said in an interview.

Economists note that public finances are heavily influenced by nominal growth, which combines increases in gross domestic product and inflation. As a result, the higher-than-forecasted inflation this year will contribute to higher-than-forecasted revenues. Some economists expect those revenues to be larger than the amount of new government spending that has been announced since the April budget.

RBC chief economist Craig Wright said it is also likely that some program expenses could be lower than budgeted.

“This math would suggest coming in below $154.7-billion should be easy,” he said. He also questioned whether the government would follow through with a smaller deficit or use that new fiscal room for additional spending. “I would prefer the former but recent performance suggests the latter is more likely.”

CIBC chief economist Avery Shenfeld declined to share the specific views he expressed in Friday’s meeting with the Finance Minister, but speaking generally about the state of federal finances, he said the deficit appears to be tracking close to the April budget forecast. He also noted that provincial governments have been posting deficits that are smaller than projected.

“From a national perspective, federal assistance and improved tax revenues are allowing provinces to collectively beat deficit targets by a wide margin,” he said. “So overall, the news for Canada on our overall public sector debt has been better than expected.”

Ms. Freeland told reporters earlier this week that the Liberal government is planning to release a fiscal update this fall. Federal deficit projections have not been formally updated by the government since the April budget.

Conservative MP Larry Brock challenged the government’s fiscal approach on Friday in the House of Commons, stating that high inflation may be good for the federal books, but it’s bad news for consumers.

“The Prime Minister’s high-tax and high-spending agenda cannot be the status quo,” he said.

Ms. Freeland dismissed the Conservative criticism as “partisan posturing” and pointed to the fact that two major ratings agencies have confirmed Canada’s triple-A credit rating.

“That is an endorsement of our government’s prudent economic stewardship and Canadians should take pride in this collective accomplishment,” she said.

Finance Canada’s monthly fiscal monitor report, which tracks federal spending and revenue trends, said the $68.6-billion deficit from April to September compares to a deficit of $198.1-billion during those same six months one year earlier, as Canada dealt with the initial waves of the COVID-19 pandemic.

Friday’s report said there was a budgetary deficit of $11.4-billion in September, 2021, compared with a deficit of $27.6-billion in September, 2020.

Unlike a fiscal update, the monthly fiscal monitor reports do not attempt to estimate deficit projections for the year as a whole.

For subscribers only: Get exclusive political news and analysis by signing up for the Politics Briefing.