Tightening fiscal space as economy falters, Deputy Treasury Secretary says

HAMILTON — Canada’s economy faces a “turbulent” year, but the federal government still has some leeway on big priorities, including a new health deal with the provinces, Deputy Treasury Secretary Randy Boissonnault said on Tuesday.

Boissonnault’s comments came as the Liberal federal cabinet met on the second day of a three-day retreat in Hamilton, Ontario, where the economy and the next federal budget were high on the agenda.

Treasury Secretary Chrystia Freeland provided an economic update to Cabinet on Tuesday, and economists and Canada’s chief statistician also briefed ministers on the situation Canada and the world are facing.

This comes the day after a joint report by the Business Council of Canada and Bennett Jones warned that the fiscal forecast and economic report for the fall outlined in the last federal budget were likely too rosy.

The report, authored by former Bank of Canada Governor David Dodge and former Liberal fiscal policy adviser Robert Asselin, said the government’s forecast was based on a “plausible but optimistic” set of economic and interest rate assumptions , which are unlikely to come true.

They warn that there is a “high probability of a deeper recession” this year and that liberal promises on everything from health care funding and increased national defense spending to infrastructure improvements and climate change will cost much more than they have so far projected.

Boissonnault said the report is one of many the government will be relying on when preparing its economic forecast ahead of the next budget. He said he believes the fiscal reality will lie somewhere between the best and worst scenarios outlined in the autumn economic statement.

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“There’s a lot of uncertainty,” Boissonnault said. “So we will be monitoring this at every step as we prepare for the budget (2023). We still have fiscal space to do the things we need to do, but the fiscal space has narrowed.”

Freeland said it’s not yet clear how the COVID-19 recession will “finally play out” and China’s reopening after years of pandemic shutdowns is also somewhat unknown.

“That means we must continue to take a tax-prudent approach,” she said.

At the same time, Freeland said that healthcare and the transition to a green economy are “real fiscal burdens” that the government needs to address.

She said Canadians look to governments to solve health care issues and Canada cannot delay the green transition because if it doesn’t move now, it will miss the opportunity.

Ongoing talks with provinces over a new health financing deal have made some progress in recent days, although a conclusion to these talks is not imminent.

Provinces have asked for billions over the next decade to bring their healthcare systems back from the brink of collapse. Ottawa insists on accountability for any new health funding, and Trudeau has not publicly committed to meeting the premier’s demands.

Kevin Milligan, a University of British Columbia economist who was among those asked to brief the cabinet on Tuesday, said it was unlikely a new health deal would involve a lot of upfront funding, making it unlikely it put pressure on government spending immediately.

Both he and Carolyn Wilkins, a former deputy governor of the Bank of Canada and now an economist at Princeton University, said the government must be careful that whatever it does on the fiscal side does not pressure the Bank of Canada to Putting pressure on interest rates to continue to rise.

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Canadians are so indebted that any rate hike today has a greater impact on the economy and on individuals than it would have in the past.

“And so it may seem difficult now to get through this phase of slower growth (where we expect higher unemployment),” Wilkins said. “But at the same time, on the other hand, we’re in much better shape than when we’re impatient.”

Trudeau began his day Tuesday by meeting with Hamilton Mayor Andrea Horwath, former chair of the Ontario NDP. The two addressed another spending pressure and major concern for Canadians: housing.

Horwath thanked Trudeau for bringing the cabinet meeting to her town, but not everyone in Hamilton was so welcoming.

“Freedom Convoy” protesters made their presence felt in small numbers over the first two days. On Monday night, about three dozen people waved flags, shouted and set off fireworks – including some apparently aimed at the building where cabinet ministers were meeting.

Most of them dispersed around 11pm, but at least one protester spent most of the night honking a vehicle’s horn on and off. It was reminiscent of the noise made by the huge horns of protesters’ trucks when protesters blocked much of downtown Ottawa nearly a year ago.

Next weekend marks the first anniversary of the convoy’s arrival in the capital. The weeks-long demonstration and accompanying blockades at several border crossings prompted Trudeau to invoke the Emergencies Act for the first time since the War Measures Act was superseded in 1988.

The final report of the public inquiry into this decision is due in February.

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This report from The Canadian Press was first published on January 24, 2023.

Mia Rabson, The Canadian Press

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