(Hamilton) The warnings are multiplying and all point in the same direction: the Trudeau government will have to temper its spending ardor if it does not want to fuel inflationary pressures and force the Bank of Canada to tighten its Monetary Policy.
Worse still, the financial projections contained in Finance Minister Chrystia Freeland’s November economic statement are already proving too optimistic, according to a recent study. As a result, the risks posed by a recession and prolonged high interest rates to the federal government’s financial room for maneuver have been underestimated.
After the Business Council of Canada, which published an analysis of the risks hanging over the economy on Monday, three experts underlined on Tuesday the need for caution in 2023 because of the severe turbulence looming on the horizon.
These three experts – Carolyn Wilkins, former first deputy governor of the Bank of Canada and senior fellow at the Griswold Center for Economic Policy Studies at Princeton University, Kevin Milligan, professor of economics at the University of British Columbia, and Anil Arora, chief statistician at Statistics Canada – provided an update on the state of the Canadian economy to Trudeau government ministers, gathered in Hamilton for a three-day cabinet retreat.
The Trudeau government is under strong pressure from the provinces to increase provincial health transfers to $28 billion a year. He is also under pressure from the New Democratic Party, with which reached an agreement last year ensuring the political survival of the Liberals in the House of Commons until June 2025. The NDP is demanding investments in the next budget to establish a national pharmacare program, among other things.
But the warning lights on the dashboard urge fiscal caution, experts say. Since coming to power in 2015, the Trudeau government has never presented a balanced budget.
“We can expect the economy to slow down considerably. We can expect the unemployment rate to increase both here in Canada and in other jurisdictions such as the United States, Europe and the United Kingdom,” said Carolyn Wilkins in a press briefing after the meeting with the office.
Mme Wilkins pointed out that the effects of the interest rate hike decreed by the Bank of Canada in 2022 to curb inflation are only just beginning to be felt. She said that if further increases are necessary, Canadians could be hard hit because of the high debt load of the Canadian population.
Most economists are also expecting the Bank of Canada to announce another key rate hike of 0.25% on Wednesday, bringing it to 4.50%.
For his part, Kevin Milligan agreed that there are “serious risks”. Interest rates, inflation and the expected slowdown in the economy will have a big impact on federal government revenues, he said.
Asked about this, Minister Freeland acknowledged that there is “a lot of uncertainty” and “volatility” affecting the global economy. But she said Canada will be able to weather this turbulent period from a position of strength. She added that budgetary prudence will be the rule of thumb when planning the next budget.
“This is the formula that any government should follow when preparing a budget. If the financial leeway is less, less needs to be done,” she said, adding that the Trudeau government had imposed fiscal discipline in the most recent budget and economic statement.
“Last year we had the smallest deficit of any G7 country and we also had the smallest debt as a proportion of G7 GDP. We did this because we understood that inflation was high and that we should not throw oil on the fire so as not to make the work of the Bank of Canada more difficult. »
In its joint report released Monday, the Business Council of Canada and the firm Bennett Jones said that the fiscal forecasts presented in the most recent federal budget and the fall economic statement were too optimistic.
The report, written by former Bank of Canada Governor David Dodge and former Liberal financial policy adviser Robert Asselin, concluded that the government’s forecasts were based on a “plausible but optimistic” set of economic and interest rates, which however are unlikely to materialize.
The authors claimed that there is a “high probability of a deeper recession” this year and that Liberal promises in all sectors will cost much more than expected – whether it is health care funding, defense national government, infrastructure improvements or the fight against climate change.
With The Canadian Press