Address by the Deputy Prime Minister and Minister of Finance to the Toronto Global Forum: Canada’s plan for a strong economic recovery from COVID-19
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I’m grateful to the Toronto Global Forum for this invitation. Thank you.
Let me begin by telling you what I won’t be talking about today.
I will not be giving you a detailed accounting of all the measures our government has taken so far to fight the COVID-19 pandemic. Or a description of our specific economic plans for the coming months.
Nor will I offer fiscal projections for the years ahead. Our government has committed to releasing fiscal projections this fall and those are coming soon.
Instead, what I intend to talk about today is the economic rationale driving our response to this global pandemic, and the strategy that underpins our phased plan for a robust, lasting recovery from the coronavirus recession.
Since the spring, we have been swept up in a tempest and forced to sail in uncharted waters. But our government has a plan. We have a compass. We know now how to get to a safe harbour and what to do when we arrive there.
You already know what our essential policy is.
It is to do whatever it takes to protect Canadians’ health, jobs and living standards; to put COVID-19 behind us as quickly as we can; and then to foster the strongest, most resilient, most innovative, most globally competitive and most inclusive economy possible.
We’ve put in place strong measures to help Canadian workers and Canadian businesses; to fund our provinces and territories directly; to buy vaccines, PPE and testing technologies; and to provide quarantine hotels and contact tracers.
And last spring, when they were needed, the women and men of the Canadian Armed Forces went in to care for, and protect, our elders.
We are doing everything in our power to keep Canadians healthy, safe and solvent.
This approach is, of course, fully in line with our government’s values. We believe passionately in a Canada where we take care of each other, particularly the most vulnerable among us – seniors, women, young people, Indigenous Peoples, Black and other racialized Canadians. And, I am proud to say, that is what Canadians are doing, with our government’s support, from ocean to ocean to ocean.
But, while I suspect you all can see how our response is consistent with our government’s deeply held ideals, I have a sneaking suspicion you may be less certain of the economic rationale for our approach.
That is what I will outline here today.
Our policies have a heart, to be sure. But they are driven just as powerfully by a prudent, dispassionate economic calculus. One that is extraordinarily important. Because the truth is that we are living through a particular moment in history when doing good – supporting each other through a hard time, is exactly what is required to do well – keeping our economy strong, as the coronavirus ravages the world.
Our first economic calculation is the simplest. Fighting the coronavirus isn’t cheap. Medical care and PPE and therapeutics and vaccines and testing and tracing cost money.
And there is also a secondary cost to fighting the coronavirus – one that turns out to be even more expensive.
This pandemic, we have learned, can only be slowed and stopped by limiting social contacts – which means restricting economic activity. It means asking people to stay home from work if they or their children are ill.
It means asking restaurants to serve fewer people, or to shut down indoor dining altogether. It means limiting travel across our borders, and even within our own country.
Now, if you were to play the penny-pinching devil’s advocate, you might argue that these economic restrictions need not, necessarily, weigh on the federal purse. The pandemic burden could, some might contend, be borne mostly by the individuals directly affected. That would be, I suppose, a rugged boot-strapper’s solution.
But that notion dissolves upon contact with real life – just as a general’s battle plans do, on contact with the enemy.
It is just not practically possible, never mind fair, to ask workers to stay home, or businesses to shut their doors, without providing the financial support they need to compensate for lost income.
People and businesses would simply refuse to comply, tearing our social fabric apart – as we have seen happen in other parts of the world, with deadly consequences.
So, providing support to those who need it is what we have done and we will continue to do. It is the economically smart thing to do. And it comes back to this guiding principle of pandemic response: Our economy will only be able to recover fully once we have defeated the virus.
That leads me to the second calculation underlying our coronavirus spending. It is this: The wisest macro-economic approach to this global pandemic is to help Canadian businesses and Canadian families get through to the other side, without going broke. We want to give our businesses and our households a bridge, so that as many of them as possible make it through, viable and intact.
Now, as I’ve said, this is the compassionate thing to do. It is also the pragmatic thing to do.
The economic shock that we’re witnessing as a result of COVID-19 is unlike the crises I covered as a financial reporter and editor – whether that be the financial crisis of 2008, the Asian currency crisis of 1997-1998, or the collapse of communism a decade earlier. It is not due to a design flaw in our economy or in our businesses. We didn’t get here because of greed or recklessness. The market isn’t correcting for a flaw. This was a completely exogenous shock. Our citizens and our companies are suffering through no fault of their own. For a government to abandon them at a time like this would be monstrous.
And it would not only be heartless. It would be an economic mistake. That is because our eventual recovery will be faster and more complete, in direct proportion to how much we limit the economic scarring caused by the coronavirus recession.
If we can keep permanent economic harm to a minimum; if our businesses are able to get back to full speed the moment restrictions are lifted; and if Canadian families have the means to spend on the goods and services they will then want and need, then, when the virus is vanquished, our rebound will be more rapid and more robust.
This is the lesson of the 2008 recession – when too many countries, including Canada, found their recoveries hamstrung by scarring that occurred during the economic downturn, prolonged by premature fiscal tightening in the years that followed.
In order for the small family restaurant or mid-sized manufacturer to come back stronger, it must first survive the winter. Its owners have to make rent. They have to keep their experienced and knowledgeable staff on the payroll. For our economy to come roaring back in the spring, we need to be sure our businesses do not permanently close their doors during the dark, cold months to come.
As the Prime Minister has said: We can and will do everything in our power to limit job losses and business closings, and minimize the decline in economic activity. By doing that, we will make it easier for Canada to rebound once we have a vaccine.
But we know some damage is inevitable. After all, this virus has already caused the deepest recession, worldwide, since the Great Depression.
That is why limiting the damage is a necessary, but not sufficient condition for future growth. Which brings me to the next step in our plan.
To ensure that our recovery is as broad, robust and complete as possible, we will need to build our way out of it. Targeted, carefully thought-out investment – on a meaningful scale – is how we will climb out of the coronavirus recession most quickly, and most effectively.
That will be the final task on our agenda, once we have conquered COVID-19. And I will have more to say about this, too, in the coming weeks.
Now: On some level, the thinking I’ve outlined here is entirely uncontroversial.
We are Canadian. We know government spending on health care works. None of us believes it is fair or right for a worker who lost her job because of COVID-19 to be unable to feed her children, pay her bills or keep her home.
We all want our beloved local coffee shops to stay in business, even if the pandemic is eating into their already thin margins. And, bearing in mind the lengthy aftermath of the Great Recession, we understand that aggressive federal stimulus is essential to building our way out of a deep downturn.
This one is worse than 2008. It stands to reason we will need to invest more, not less.
So, the concern about pandemic spending is not about our aims or our intent. It’s about capacity. Canadians are careful about the nation’s finances. I know this very personally. I am from rural northern Alberta, which is not, culturally, a place much steeped in the ideas of helicopter money. And the question I hear from there, and in downtown Toronto too, is this: Can we afford it?
I am going to start with a simple answer, and then I will elaborate.
The simple answer is – yes, we can.
Let me tell you why.
First, because we entered this crisis with the fiscal firepower to do what we need to do. This is fact, not opinion. When COVID-19 hit, Canada had the lowest net- debt-to-GDP ratio in the G-7. Today, following our country’s most aggressive burst of emergency spending since the Second World War, Canada is still expected to have the lowest net debt-to-GDP ratio in the G7.
Added to our relative fiscal strength is the prevailing global economic climate. Interest rates are at historic lows, particularly for fiscal stalwarts such as Canada – notwithstanding our unprecedented spending to fight the coronavirus, Canada's interest charges, as a share of GDP, today are at a 100-year low.
That’s right: We are spending less to cover interest on our debt, relative to the size of our economy, than at any time in the past century.
To put this in perspective: In 1995, Canada’s debt-servicing costs as a percentage of GDP were six per cent. Today, even after the unprecedented expense of battling the pandemic these past months, that figure is expected to be 0.9 per cent of GDP.
And we are locking in those low costs by issuing more debt into longer-term instruments, at these historically low rates.
Now, for Canadians of a certain vintage – and I freely admit to being one of them – the idea of increasing government debt holds particular terrors. We remember the fiscal shock of the 1990s, when Canada flirted with insolvency.
And, especially among those of us who cherish the accomplishments of Paul Martin and Jean Chrétien, we remember how Canadians heroically – and through great sacrifice – climbed our way out of that debt purgatory, and built up the fiscal war chest that is serving us so well today.
Both the terror and the triumph were formative for a generation of Canadians. But it is a poor general who fights the last war. And the reality is that, today, the prevailing global economic environment is changed entirely.
In fact, not one of the factors that drove the fiscal crisis of the 1990s holds true today. I will repeat: Not one.
It’s true that interest rates easily outpaced growth in the 1980s and 1990s. But as Olivier Blanchard, the former chief economist of the International Monetary Fund, pointed out in a seminal paper in 2019, those two decades seem to be an anomaly. Over the past 80 years, with the exception of the 1980s and 1990s, the pattern is the one we see today, where growth exceeds interest rates.
As we look ahead to an industrialized world with an ageing population and a tendency toward secular stagnation, deflation and sub-par growth seem likely to pose greater risks than the twin threats of inflation and spiraling debt that Mr. Chrétien and Mr. Martin successfully countered in the 1990s.
The upshot is that we are living today in a world where the risks of fiscal inaction outweigh the risks of fiscal action. Doing too little is more dangerous and potentially more costly than doing too much.
This is not an idiosyncratic view. It is the consensus, including among Canada’s major banks. “While interest rates are extremely low,” CIBC Capital Markets said in a note last month, “governments can and should ramp up borrowing and spend to cushion the economy from COVID’s wrath. Larger debt loads are also less of a scare story if, as we expect, we don’t see a return to the interest-rate environment of the 1980s and 1990s.”
Just as there are no atheists in foxholes, it seems there are few disciples of Ayn Rand in a pandemic. We’re all in this together.
Now, even as I utter these words, I feel what may be a peculiarly Canadian discomfort. We are, after all, the proud inheritors of a society built on the ideals of peace, order and good government, rather than the seductions of revolutionary change. Caution is a very Canadian virtue.
But, let us remember: Canada is a hugely diverse country built by the resilience and wisdom of Indigenous Peoples, and the courage and endurance of immigrants who bore great risks to build new lives here, as well as their descendants. As Margaret Atwood concluded in her ground-breaking survey of Canadian literature, we are, first and foremost, a country of survivors. And one of the first lessons of survival is that you must do whatever it takes – and whatever you can – when the wolf is at the door.
To coin a gentler metaphor, surely the purpose of fiscal rigour is to prepare us for a rainy day. And I think we can all agree that that proverbial rain is falling today and falling hard. Failing to buy an umbrella, when it is raining and you can afford one, is not prudent. It is foolish.
As the Financial Post’s Kevin Carmichael recently pointed out, “Yes, it’s unfair to saddle the next generation with our debt, but it would be worse to bequeath them a weak economy.”
Having said that, let me offer this important caveat. While advocating expansive fiscal policy to battle COVID-19 – and to grow our way out of the coronavirus recession – I am not among those who think Canada should have a fling with Modern Monetary Theory, which holds that deficits don’t matter for a government that issues debt in its own currency.
Whether on Bay Street or Main Street, there are no blank cheques, and there are no free lunches.
Our fiscally expansive approach to fighting the coronavirus cannot and will not be infinite. It is limited and temporary. A smart and careful government – and those are two adjectives I would use to characterize our policy – will impose those limits upon itself, rather than waiting for the more brutal external restraints of international capital markets.
I will have further thoughts to share soon about the fiscal rules and limits by which we will govern ourselves. But let me today offer this consideration.
We have a moral imperative, but also a hard economic imperative, as I’ve argued, to fight the coronavirus with all our might, and to provide our people and our businesses a bridge to get through to the other side.
As we beat down this virus, we will need to provide meaningful investment to build our way out of the coronavirus recession, and to ensure our economy comes roaring back, stronger than before.
That means laying a foundation for a green economy, an innovation economy and a fair economy that supports good jobs for all Canadians. It means ensuring the recovery is long-lasting, robust and equitable.
As that occurs, we will resume the long-standing, time-tested Canadian approach, with fiscal guardrails and fiscal anchors, that preceded this pandemic. For these are the very policies that left us so well positioned to meet this generational challenge.
Today I’ve cited historical experience and economic research to buttress my argument. But we’ve now been fighting the coronavirus for many months. We have some initial evidence about what works economically, and what doesn't.
And the good news is that Canada’s COVID-19 response, from public health, to support for the provinces and territories, to emergency economic programs that sustain workers and businesses, has fostered a promising, though, still uneven employment rebound.
Economists from TD Bank noted last week that job growth in Canada now exceeds the rate in the United States, the international economy with which we are most closely tied.
That divergence led the bank to suggest it may be time to amend the adage we all know so well – that when the US sneezes, Canada catches cold. Instead, the analysts offered, perhaps we should say: “When the US sneezes, Canada builds antibodies.”
Let me end these remarks by placing our own debates in an international context.
Two weeks ago, the fall IMF/World Bank meetings took place – held virtually this year, of course.
Two things struck me about those meetings.
The first was the clear consensus that, for countries that can afford to borrow and spend, now is not the time for half-measures. Finance ministers from around the world agreed that the risks of withdrawing support too soon outweigh the dangers of spending too much.
Second, there was broad international agreement that, with interest rates approaching zero, monetary policy is running out of bullets. That puts the onus squarely on fiscal policy to grow our way out of this recession.
Prudence a generation ago meant deep cuts to public spending. Today, it means we support our people and businesses as they battle this pandemic, then move beyond it, and ultimately thrive in the recovery that will follow.
It’s notable that the leaders of the charge for expansive fiscal policy in 2020 are none other than the flinty-eyed economists of the IMF, formerly the high priests and chief theologians of austerity.
As the Financial Times put it in editorial commending this historic turnaround: “Coronavirus has led to economic disruption on a scale not seen since the Second World War. As was the case after 1945, state investment is necessary to rebuild economies and provide jobs. The IMF’s message is that premature fiscal tightening in the aftermath of the crisis will harm, not heal, economies. It is one that ought to be welcomed – and heeded by politicians.”
I could not have put it better myself. This is the right policy for the world. It is the right policy for Canada. And it is one that this Canadian politician is very committed to heeding.
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