Chrystia Freeland delivers a (relatively) restrained economic update

Pierre Poilievre’s argument against the federal Liberal government rests on a very simple premise: that excessive federal spending is the root of all evil. According to the Conservative leader, federal spending has driven up inflation and inflation has led to higher interest rates, and the combination of the two has made everything terrible.

With that in mind, Poilievre was understandably excited on Monday to highlight an analysis published by Scotiabank that found government spending was ultimately responsible for driving the Bank of Canada’s key policy rate 200 basis points higher than it might have gone otherwise.

“Scotiabank says that government deficits have added two percentage points to interest rates,” Poilievre told the House of Commons.

The fine print is less helpful to the Conservative leader. Seventy of those basis points are linked to spending by provincial governments (most of which are currently run by conservative-minded premiers). Another 20 points are the responsibility of municipal governments.

That still leaves 110 basis points — the equivalent of 1.1 percentage points — tied to federal spending over the past four years. But 80 of those points were driven by federal spending to support individuals and businesses during the pandemic.

Sean Fraser, the Liberal minister of housing, eventually got around to pointing this out to the Conservatives. He asked the opposition side to imagine what the situation would be now if the government hadn’t provided those supports.

The political, economic and fiscal reality of this moment — defined by persistent inflation and higher interest rates — still seemed to be written all over the Fall Economic Update Finance Minister Chrystia Freeland tabled Tuesday afternoon.

“The foundation of our fall economic statement is our responsible fiscal plan,” Freeland told the House.

The relative responsibility of Liberal fiscal policy has been up for debate since the moment during the 2015 election campaign when Justin Trudeau said a government led by him would run a deficit to fund its chosen priorities.

For 20 years — from 1995 to 2015 — it was accepted wisdom that running a deficit was inherently bad, something that could be barely tolerated only in the event of an economic crisis. And that shibboleth of official Ottawa has proved exceedingly hard to shake.

For sure, the Liberals have not helped their cause with a run of deficits that have been higher than promised. But in her remarks to the House, Freeland emphasized the relative soundness of the federal government’s books, at least when compared to other G7 countries. She also noted the government’s current efforts to cut or re-purpose $15 billion in federal spending.

The new spending announced on Tuesday is relatively restrained. Freeland did not table the sort of mini-budget that recent fall updates have become. Finding things the government could do without committing significant new funds seems to have been the order of the day — and nearly all of the new measures are aimed at addressing the cost of living concerns that dominate federal politics right now.

“We are taking care not to feed inflation — by carefully targeting new investments towards the priorities of Canadians today, and towards the future growth that makes our finances sustainable,” Freeland said.

The fiscal hawks are circling

Poilievre was unimpressed.

“With this $20 billion of costly new spending, this update can be summed up very simply: prices up, rent up, debt up, taxes up, time’s up,” the Conservative leader said after Freeland had finished.

The Conservatives, he said, would be voting against “this disgusting scheme.”

Poilievre’s taunts notwithstanding, the Liberals seem to be contending with some basic realities. With the Bank of Canada increasing interest rates to combat inflation, the economy has slowed. The government has to take care to avoid feeding inflation. It might also be worried about disappointing credit rating agencies. Meanwhile, higher interest rates have increased the cost of servicing the federal debt.

Even if the government was eager to spend a lot more right now, it seems to have decided that its room to manoeuvre is limited.

That likely complicates any hopes the NDP might have had of seeing a national, single-payer pharmacare program implemented over the next two years. But Poilievre and other fiscal hawks will still find plenty to worry about here.

Compared to the outlook presented in the spring budget, the deficit for the current fiscal year is virtually unchanged. But the shortfall is now expected to be larger over the next four years.

Federal debt as a share of the economy — the debt-to-GDP ratio — is still expected to decline over the medium term, but not before rising slightly to 42.7 per cent next year. The annual public debt charge — the interest the government pays on its total debt — is also now projected to peak at 1.8 per cent of GDP, twice what it was before the pandemic.

Those numbers are hardly unprecedented. At 42.7 per cent, the debt-to-GDP ratio would be roughly where it was when Jean Chretien left office. Public debt charges as a share of GDP were higher as recently as 2007.

Can Liberals convince Canadians it’s all worthwhile?

If Tuesday’s update manages to avoid pushing up inflation and interest rates (and makes for happier voters as a result), the Liberals might consider it a successful exercise. But that still might amount to only half the battle.

Poilievre’s argument isn’t simply that the government is spending too much. He also argues it’s not accomplishing very much with all the money it’s spending. That too is hardly a new criticism, but it’s one the Liberals have long struggled to rebut.

It’s also a more relevant debate. The size of the federal government’s spending envelope has always been less interesting than what it did with it. And making the case that the government has accomplished something with those deficits seems vital to the Liberal cause ahead of the next election.

In her budget speech and in the economic update itself, Freeland highlighted the implementation of the Liberal child care program and the money families with young children have saved as a result.

But memories are short, and voters aren’t obviously in a mood to reward the Liberals just because they implemented a national child care program — which may be why the finance minister spent nearly half of her speech talking about housing.

“Our country needs more homes — and we need more of them, fast,” Freeland said, promising to tackle the problem with “purpose, drive and intensity.”

However much the government spends or does to get those house built — and whatever the size of the deficit that results — voters will be looking for some tangible signs of progress.

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