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Fiscal Policy in Challenging Economic Times: Risks & Opportunities

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Don Drummond provided an informative overview and in-depth insights on Canada’s fiscal policy outlook in early 2023, including where the risks and opportunities lie. Among his key themes is the combination of slowing economic growth rates and increased debt burdens that make it essential for future fiscal policy to be more efficient in delivering outcomes.

Canada’s macroeconomic policy mix was explored in detail. With monetary policy tackling the threat posed by inflation, fiscal policy should not be competing against that objective apart from providing a level of protection for those who are most vulnerable. Beyond the challenge of current inflation, Drummond raised concerns about the debt-to-GDP levels at the federal and provincial levels. While several western provinces have sustainable debt levels, he stressed that the debt burdens of Ottawa and other provinces need to be lessened so that Canada can better absorb future economic and other shocks.

Concerns were raised about government forecasts being optimistic rather than realistic on revenue growth. He called out the costs of climate change, especially the costs of policy inaction. These need to be explicitly factored into budgets and economic projections. He pointed out increases in carbon prices will not necessarily cause economic harm given the pledge to recycle the revenue. Instead, the much greater risk arises from inadequate recognition that Canada has a carbon-intensive economy that does not have a history of a high rate of innovation to facilitate the green transition. Canada should not match U.S. policy on green subsidies; rather we should better reflect our unique economic strengths and challenges to ensure sustainable growth. He felt Canadian policies are more weighted to carbon reduction than growing clean energy, and potentially need rebalancing.

Drummond stressed that more care is needed in assessing the impacts of rising immigration. While positive for GDP growth and reducing labour force shortages, the key policy indicator should be the increase of GDP per capita. Policies and processes to improve selection criteria and achieve better workforce integration are essential for higher immigration to effectively boost economic growth rates and standards of living. He highlighted the challenges to federal immigration policies given provincial or municipal jurisdictions over key areas such as housing, education and training. Improved policies from assisting English language skills development to more affordable housing access will require a coordinated, comprehensive approach to solving these and other workforce integration issues.

It was noted that extraordinary monetary and fiscal stimulus during the pandemic was necessary. Even if the fiscal programs were, in retrospect, larger than needed, it was an unprecedented time and better to err on the side of generosity given the scale and speed of the crisis. However, he stressed that now is the time to reduce the debt ratio. Canada also needs much greater emphasis on getting “bang for your buck” with government programs and finding ways to make the system more efficient. He highlighted the need for policies to reduce inter-provincial trade barriers and address weak business investment in this regard.

Finally, Drummond also posed critical questions about Canada’s need to learn more from the past. He cited examples such as after our experience with SARS, should we not have built greater capacity in our healthcare system? Given our COVID-19 experience, will we improve our delivery of essential government services, noting high-profile deficiencies such as processing passports and visas? As systemic shocks become more frequent, we need to efficiently build capacity and resiliency to prepare for them.

Speaker:

Don Drummond headshot

Don Drummond

Stauffer-Dunning Fellow and Adjunct Professor at the School of Policy Studies at Queen’s University, and Fellow in Residence at the C.D. Howe Institute