The central bank chief says the Liberal government’s decision to run deficits will help boost stagnant economy.
More good news for Justin Trudeau. The Bank of Canada has effectively given its seal of approval to the Liberal government’s big-deficit policy.
Speaking to reporters Wednesday, central bank chief Stephen Poloz said the government’s decision to run $29-billion deficits this year and next will more than offset the negative effects of a slowing world economy, a rising Canadian dollar and low oil prices.
The net effect, he said, is that he now expects Canada’s economy to do better this year than the Bank had predicted in January.
In an accompanying report, the bank says the government’s decision to spend more than it takes in promises to add an extra half a percentage point to the economy’s growth rate.
Not that this growth rate will be enough to make Canadians cheer. When inflation is taken into account, the central bank expects gross domestic product, a measure of all goods and services produced, to grow by a paltry 1.7 per cent this year.
Indeed, the story coming from the Bank of Canada is that this country will be stuck in the doldrums for at least another year.
The world economy continues to struggle. China, a crucial player, faces financial stress. Japan’s wage growth is lacklustre. In Europe, investor confidence is sagging.
Throughout, downward pressure remains on the price of oil and other commodities that Canada sells abroad.
The crucial U.S. economy is recovering but not at the pace the bank had expected in January.
The Canadian dollar has bounced back up to the mid-70-cent (U.S.) range — good news for Canadian cross-border shoppers perhaps but bad news for domestic firms trying to export to the U.S.
Still, for the Trudeau government, the central bank report comes at an opportune time.
The Conservative opposition has been hammering the government for its deficit projections, saying it is saddling future generations with debt.
Not really, says the bank. Poloz told reporters that in relative terms the Liberal deficits won’t add much to the federal debt and that he doubts financial institutions will fret much.
Citing the late British economist John Maynard Keynes, Poloz said the decision to run deficits means Canadians don’t have to rely on the central bank alone to keep the economy above water.
In his words, the “mix of policies” has become more favourable.
Nor was Poloz impressed by the Parliamentary Budget Office’s critique of the budget. The office, which provides independent economic analysis to MPs, had questioned Finance Minister Bill Morneau’s claim that deficit spending would create or maintain 43,000 jobs this fiscal year and 100,000 in 2017-18. It predicted far fewer.
Asked about this, Poloz said he thought Morneau’s finance department officials got the numbers just about right.
All of this is politically important. In the arcane world of finance, the words of the central bank governor carry considerable weight.
Moreover, Poloz — who was appointed to his post by former prime minister Stephen Harper and can’t easily be accused of Liberal toadyism — has been consistent in his plea that Ottawa take some kind of fiscal action to help the economy.
Such pleas were by necessity muted. It’s considered bad form for the Bank of Canada governor to interfere openly in the finance minister’s business and vice versa.
But Poloz has made it clear for some time that his ability to influence interest rates can do only so much to keep the economy on track and that the government, with its control over spending and taxation, should do more.
With their decision to deliberately run stimulative deficits, Trudeau and Morneau have complied.
None of this takes the real pressure off the government. In the end, voters will judge Trudeau’s Liberals by what they accomplish, not by what the governor of the Bank of Canada says about them.