One year ago, Bank of Canada governor Stephen Poloz decided, as he put it, “to take out some insurance.” He surprised markets by cutting the bank’s benchmark interest rate. That move, followed by another quarter-point cut a few months later, turned out to be the right one: Lower rates, and the lower Canadian dollar they encouraged, helped to cushion the blow of falling oil prices.
But the Canadian economy remains fragile, with a further plunge in oil prices over the past few weeks raising new worries. It’s why the betting is that on Wednesday, Mr. Poloz will cut rates by another quarter point. It’s also why there are growing calls for the government to roll out some extra spending this year, and post a shortfall larger than the $10-billion deficit promised during the election campaign. The loudest appeals for deficit stimulus are coming from Bay Street economists, and Mr. Poloz has dropped his own supportive hints.
All things considered, it’s not a bad idea. It makes sense for the federal government to take out some insurance of its own, by running a bigger-than-expected deficit in 2016-17.
But before we start prescribing the medicine of deficit spending, we have to identify Canada’s economic illness. In its nature and severity, the current ailment is unlike what the country was suffering from the last time the feds opened the spending taps.
In 2009, the global economy was threatened with cardiac arrest. One of Ottawa’s responses was a multiyear stimulus plan, led by a 2009-2010 deficit weighing in at more than $55-billion. Faced with a worldwide financial crisis and recession, it was the right call.
So far, that is not what 2016 looks like. Our main trading partner, the United States, has recently been enjoying modest but real growth, and while there may be another big global downturn in our future, there isn’t one in the present.
But Canada is having a recession – or at least part of the country is. Because of the collapse in oil prices, and the impact on investment and jobs, the economy of Alberta, Saskatchewan and Newfoundland and Labrador has been contracting, even while the rest of the country’s economy has continued to grow, albeit slowly.
However, just as the global financial crisis proved to be more devastating than anticipated, Canada’s oil-price shock risks causing a lot more pain beyond the oil provinces. Unless prices bounce back, it’s difficult to tell a story that ends with anything other than less business investment and more layoffs, with knock-on effects beyond the oil patch.
Critics of the run-a-bigger-deficit school point out that Canada is experiencing a supply shock – there is too much oil in the world, which has driven prices down. The way to respond is through a floating currency, with a lower loonie stimulating other sectors, such as exporters in Quebec and Ontario. They’re largely right, and it’s largely what is happening.
But the transition to an economy with less petro-employment is painful, as a rapid downturn in the oil sector is not being perfectly matched by a pickup everywhere else. The Bank of Canada’s latest Business Outlook Survey showed business hiring and investment intentions at their lowest level since 2009, and that was before oil’s most recent plunge.
At the same time, interest rates have never been lower. The government of Canada can borrow for 10 years at less than 1.2 per cent. And Ottawa’s debt-to-GDP ratio, at 31 per cent, is also relatively low, and it would take a recession or a deficit topping $20-billion to nudge it higher. The cost of a fiscal stimulus insurance premium has never been lower, even as the need for it, though far less than in 2009, is higher than any time since.
In other words, Ottawa could easily rerun 2009’s giant deficit if it had to, many times over. Luckily, there is currently no need for that. These are not desperate times and desperate measures are not called for. But they aren’t exactly sunny economic days, either. Ottawa should make some prudent, targeted moves, delivering real benefits to those hurt by a painful economic transition. For example, the feds could front-load more of the decade-long, $125-billion infrastructure program into 2016, or temporarily offer greater unemployment and retraining benefits to jobless Canadians, as was done in 2009.
So long as the new, stimulative spending is time-limited, and doesn’t involve permanent program expansions, it’s difficult to see the downside of a spring budget with a deficit well above the Liberal platform’s $10-billion target. Economic insurance isn’t free, but it has never come cheaper.