Sari about Fiscal Policy

Freshly back from his foray on the runways during fashion week in India, our PM returned and had his pal Finnegan table his government’s budget. (Can’t wait to see what JT, Sophie and the kids will be wearing when they visit the San people in South Africa).  Not surprisingly, it turned out to be more of a political document rather than an economic blue print needed to address the challenges that confront Canada.    

Over the last half of year, headwinds to economic growth in this country have stiffened.  Growth has dropped from well over 3% in the first half of 2017 to bump along around 2% at best.  There is little that the government can do about the damage to investment being caused by an erratic Trump and what he may or may not do with Nafta but there are many things that have negatively impacted the competitiveness of our economy that have been self inflicted that could have been acknowledged.  Apart from the seismic shift in international competitiveness resulting from American tax reform, recent domestic policy changes have excessively burdened our industries.  As one person noted to me, there is no sense that Canadian politicians have the “back” of business.  There is no thought of where the money comes from that these toads like to spread around in their party’s name.  From dramatically raising minimum wage to consistently throwing more regulation and environmental studies at projects, there is a sense of fatigue. 

This budget reminded me that the notion recently brought forward by the Bank that they could work in a coordinated and ex-ante way with the government to address consistent inflationary or deflationary forces is fantasy.   The government would have the Bank’s back only if it was viewed by the government in power as politically expedient.  Right now gender issues are more important than showing leadership to end interprovincial spats that keep Canadian produced oil prices depressed;  more important than keeping our overall business taxes competitive; more important than facilitating critical infrastructure in a timely manner; and more important than readying the overall fiscal situation to be prepared for the next downturn.

So all this leaves monetary policy as the only game in town to offset these challenges.  Rates will be lower longer and the currency weaker than would be the case if Mr. Dressup and his government had a different agenda.  With C+I+(X-M) sagging and no change in G (no Justin that does not mean Gucci) look for the Bank to do what it does best for a while….absolutely nothing.