Jack Mintz: Bank of Canada Governor Stephen Poloz’s comment that Canada can handle commodity price swings is correct, as we have done it often. However, I don’t think we are in a cyclical situation. The commodity price boom is over and while resources will be a continuing strength for Canada, we will be looking at a different economy in future. A low-dollar economy is not the ideal. We need structural changes to improve economic growth and labour productivity.
None of the parties propose a comprehensive growth-oriented agenda that is much different from what we do already. Child care, efficient taxation and infrastructure is good, but it is not the answer. We should be looking at trade, tax, labour and regulatory reforms to create a more competitive and dynamic economy.
Christopher Ragan: Jack is right that the current decline in world commodity prices may not be a normal cycle, and thus we need to focus on structural issues while making sure that we retain our ability to respond to cyclical forces. These won’t be disappearing any time soon. Adjustments aren’t easy, or painless, but there’s only so much a central bank can do. We need better structural policies to allow the economy to adjust to inevitable shocks – policies that improve existing regulations, enhance competition and trade, and reduce some of the rigidities in the labour market.
Eveline Adomait: So we are all singing off the same song sheet. Mr. Poloz’s commitment to flexible exchange rates means government spending should focus on smart projects that lead to long-term growth. The government needs to help people and capital move easily.
Sadly for the workers with high-paying jobs in the oil patch, they will need to be retrained for a new sector. These layoffs are not like RIM, whose workers easily went to other high-tech companies. Drilling and mining skills seem very job-specific to me, but I could be wrong. Maybe Liberal Leader Justin Trudeau is right that these workers can shift easily to road, railway, bridge and subway construction.
I think infrastructure spending has to be the priority. Gridlock in our major cities reduces productivity and, because of commute times, raises home prices in those centres. Major cities and the connections between cities to borders should be the focus of the next government’s infrastructure spending.
Globe and Mail:
With Consensus Economics lowering its growth outlook for Canada well into 2017, and predicting that 2015 will come in at just over half of Conservative Leader Stephen Harper’s 2-per-cent call, should the NDP and Conservatives shift their focus on balanced budgets?
C.R.: One of the big advantages of Canada’s very low debt-to-GDP ratio is that it provides space for the government to use fiscal policy to stimulate a slow-growth economy. This is exactly what we now have. This is not an argument for large-scale wasteful spending on silly projects. But for smart projects that deliver benefits to current and future generations, and that can improve the efficiency of our economy, there is a compelling case for more spending – now.
E.A: So which of the promises made by the party leaders are “smart” infrastructure spending leading to economic growth?
Among the many promises so far: The Conservatives would support a new marine terminal in Montreal and spend $200-million on improving Internet access in remote and rural areas; the NDP would build 200 health clinics, and reopen the maritime rescue subcentres in St. John’s; the Liberals would provide $1.5-billion for public transit in Calgary, and increase spending to $125-billion to fund unspecified partnership projects for public transit, social infrastructure and green infrastructure
The NDP platform seems deficient in this area; it isn’t about infrastructure. Fixing ports seems like a good idea to me, although you need good transportation routes to get the trucks to the ports. The Liberals are making a credible attempt to give a framework, but I don’t know how much of this money goes to social housing and seniors’ residences, for example, or what “green” really means.
J.M.: Given external factors, a modest deficit will virtually have no effect on Canada’s growth, which will happen at a 2-per-cent pace anyway. Buoying up demand through more government spending is not the appropriate policy, since structural improvements are needed instead. What is key is fiscal discipline.
Balanced budgets provide an anchor to enforce fiscal discipline by a minister of finance, as we saw in the Paul Martin years. If deficit limits are not imposed, the insatiable demands for government spending are difficult to resist. The result will be unencumbered growth in our $600-billion of federal debt left to future generations alongside other unfunded liabilities.
E.A.: You’re right about running a typical deficit now. I am for a cyclically balanced budget and I don’t think we are at a spot in the business cycle that demands a deficit. We have to save some space for a really bad, unanticipated downturn like that of 2008. Hopefully, with the United States picking up steam, a low Canadian dollar and resource sectors actively looking for ways to innovate, we can weather this modest downturn.
J.M.: A serious recession, such as 2008-09, requires a deficit at that point. However, growth rates at 2 per cent do not. The key is improving productivity to raise the long-term growth rates that require structural change. The one difficulty with cyclical budgetary policy is knowing what is cyclical and what is structural.
Too many governments run deficits for years assuming that the good times will return. However, like you, I endorse the 2008 fiscal stimulus done in Canada and elsewhere during a very bad time.
C.R.: I think the best measure of fiscal discipline – in economic as opposed to political terms – is the debt-to-GDP ratio. Canada’s is now just above 30 per cent, the lowest in the G7, and will continue falling as long as deficits are small. The real argument related to spending now is that Canada has real needs for more and better public infrastructure, as the mayors have been saying quite credibly for some time. We need better infrastructure, and now is a very good time to spend on it, with very low interest rates. Deficits of even 1 per cent of GDP will not have a huge impact on overall GDP growth, but they will take the edge off a slow-growth economy, which is good.
J.M.: One has to be careful with net debt ratios. Assets in the Canada and Quebec pension plans are deducted from debt and only benefit payments in the current year are included in liabilities, so a significant portion of unfunded liabilities in the pension funds are not included in net debt.
I think the gross debt number is valuable to remember, which is 86.9 per cent of GDP for all Canadian governments – and is not such a good number. Without balanced budgets, gross debt can pile up pretty quickly.
E.A: The big concern is that debt can grow faster than GDP and become a drag on potential growth. Many credible studies have shown that when external debt to GDP rises above 90 per cent, which is close if we take Jack’s numbers and not so close if we take Chris’s, growth slows by 1 per cent. It may be that debt (internal and external) is a signal of more important issues of good governance.
Spending needs to be more than just vote buying. Budgets are two-sided beasts: spending and revenue. We should get spending right and then sort out the ways to fund it.
G&M: What do you think of Hillary Clinton’s rejection of Keystone XL? What impact might that have?
E.A.: When it was clear President Barack Obama would not approve Keystone, it became a waiting game for him to leave office. Ms. Clinton’s decision increased the chance that his successor will also say No.
Oil already travels southward and east-west by rail, so pipelines are more about capacity and transport cost than about whether oil gets to market. The alternative pipeline routes are Northern Gateway to the B.C. coast, twinning the Kinder Morgan line to Vancouver, and reversing the direction of Energy East through Ontario. Her decision puts the spotlight on our party leaders to state their positions on alternative routes.
Mr. Harper, whose government approved Northern Gateway, wants to make sure western oil can get to a coast any way possible. NDP supporters want the oil sands to be landlocked, but Mr. Mulcair has spoken favourably about some of the proposals. Mr. Trudeau blamed Mr. Harper for Mr. Obama’s decision on Keystone, which Mr. Trudeau supports; the issue now is whether he is willing to back any of the alternatives.
J.M.: Ms. Clinton’s reason for rejecting Keystone – that it is a distraction from climate policies – is nonsensical. Oil would instead go by train, which is less safe and results in higher greenhouse-gas emissions. Canadians were hoping the next president might take more interest in North American issues such as energy, border transportation, agriculture.
If she becomes president, and turns out to be Obama-lite, Canada will continue to have mediocre relations with the U.S. no matter who is prime minister.
Dr. Jack M. Mintz is President’s Fellow of the School of Public Policy at the University of Calgary. He serves on the boards of Imperial Oil Ltd. and Morneau Shepell, and is chair and vice-president of the Social Sciences and Humanities Research Council of Canada.
Eveline Adomait is an economics professor at the University of Guelph, a former TEDx speaker, and author of Cocktail Party Economics: The Big Ideas and Scintillating Small Talk about Markets and Dinner Party Economics: The Big Ideas and Intense Conversations about the Economy.
Christopher Ragan is an associate professor of economics at McGill University, research fellow at the C.D. Howe Institute, and author of Economics, the most widely used introductory economics textbook in Canada.Report Typo/Error
Follow us on Twitter: