Not long ago, Chrystia Freeland’s budget would have been an act of political self-destruction
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Hey there, time traveller!
This article was published 20/04/2021 (482 days ago), so information in it may no longer be current.
In the olden days of budgeting, say even just two years ago, Chrystia Freeland’s first budget would have been a disaster.
Creating thousands of jobs when the labour market is already well on its way to recovery would have been considered an aggravation to hiring managers everywhere and a driver of inflation.
Subsidizing companies to stay afloat even if they’re not sustainable in the long run would have just made no sense.
Subsidizing them to hire — even worse. Highly inflationary.
Spending big at a time when pent-up demand and household savings are ready to gush would have been just flushing money down the drain.
And running up enormous deficits without at least hinting at an eventual return to balance would have been unacceptable to investors, bond-rating agencies and the general public.
But Monday’s budget is fearless in its big spending and its unapologetic push to put everyone back to work quickly, developing new supports for business and workers alike — with an enormous price tag.
“Our response needs to be different,” says Freeland in a phone interview from her home in Ottawa. “This is a time when we’re doing a lot because we need to do a lot.”
She walked over to her desk to refer to three papers she had been keeping on hand for guidance as she put together her first budget: research by Arthur Okun of the Brookings Institute showing that full employment benefits low-income workers, women and young people, and is not necessarily inflationary; a paper by Pierre Fortin, Luc Godbout and Suzie St-Cerny about Quebec’s child care system pulling women into the workforce and leading to economic growth; and Olivier Blanchard’s arguments on the relationship between interest rates and growth.
“Put bluntly, public debt may have no fiscal cost,” Blanchard writes, because historically, interest rates are usually lower than the rate of economic growth.
In other words, Freeland believes she has done her homework and it compels her to pile on billions of dollars in help for young workers, for child care, and for small business so that even those on the fringes of the labour market find meaningful work.
In her interview, Freeland frequently mentions her conversations with Janet Yellen, the U.S. Treasury Secretary and a labour economist who has urged other countries to follow her lead and go big with government spending to slingshot out of the pandemic recession.
And that’s what Freeland has done, testing the limits of the economy to absorb huge amounts of government money just as the private sector and households also let loose with their savings.
“I would say the core idea of this budget is a really simple one, which is: we need growth, and we need to invest to grow — in social infrastructure, in physical infrastructure, in human capital, in physical capital. That’s at the real heart of the budget,” she says.
Indeed, the government dedicates much of the first 50 pages of the 720-page tome to explaining why the economics of old no longer applies — and not just because of the pandemic. Canada, like many other countries, is heading unapologetically down the path of fiscal expansionism and government activism in the economy. The pandemic was only the beginning.
The economy doesn’t function the way we used to think it did, the budget says, and as a result, government spending needs to be seen in a whole new light. Rather than a force for filling in gaps where markets have failed or where society needs support, government spending is a driver where there’s very little downside to its activism.
“The risks of sustaining strong labour markets may also be lower now than previously believed. The relationship between the tightness of the labour market and inflation appears to have weakened in recent decades in many advanced economies. This suggests that a strong economy with low levels of unemployment could persist for an extended period before running up against higher inflation,” the document states on page 43.
That’s in tune with central banks that have been asking questions about whether inflation is just lower these days regardless of what happens to wages, with global competition keeping the price of so many goods perpetually flat.
Canada’s central bank is always on the lookout for any sign of inflation, ready to raise interest rates to keep it at bay when need be. But in the meantime, they, too, point out that inequalities in the workforce undermines the country’s economic prospects more broadly, and wants to see strong employment growth.
But Freeland stresses that she hasn’t abandoned all her Canadian caution to the arguments of academics. She says it was very important to her that the budget show Canada’s debt burden eventually put on a downward track, with government spending stringently oriented toward promoting growth.
“I don’t think governments can spend with impunity,” she says. “I do think there are limits to what we can spend and borrow.”
The budget sets Canada on a big-spending track that Freeland hopes will alleviate the pain of the pandemic but also resolves some underlying inequities in our society, but without putting Canada’s fiscal reputation at risk.
That would have been a true disaster.
Heather Scoffield is the Star’s Ottawa bureau chief and an economics columnist. Follow her on Twitter: @hscoffield