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Freeland should take lessons from U.K.

HEATHER SC OF FIELD

If you, like Finance Minister Chrystia Freeland, suddenly had a few extra billion dollars land on your doorstep, what would you do with it?

Preferably not what the United Kingdom is doing in the guise of fighting inflation right now.

Britain’s brand-new finance minister, Kwasi Kwarteng, presented a mini-budget last week that immediately sent the British pound, bonds and stocks into a steep plunge.

Currency markets around the world are still shaken.

In order to stimulate the flagging British economy, Kwarteng rolled out a series of tax measures — reversing recent tax increases, cancelling planned increases, removing the top income-tax bracket, and implementing new tax incentives to attract investment.

At the same time, he wants to spend £60 billion — about $88 billion Canadian — over the next six months to help consumers and companies pay their energy bills.

The plan is meant to spur growth and take the edge off inflation at the same time. But it’s poised to do neither, and markets are taking a beating as a result. Which brings us to Canada’s options.

Freeland is in an interesting position right now, with corporate profit galloping ahead of the Finance Department’s wildest dreams. Government revenue is now bulging.

It’s hard to put an exact number on how much extra money they have on hand, but it’s many billions. Just three months into this fiscal year, federal revenue is running 20 per cent higher than a year ago, and spending is running 20 per cent lower. In the last budget, Ottawa expected revenues to increase by 3.5 per cent and expenditures to fall 10 per cent.

That kind of trend line probably won’t continue, warns Scotiabank economist and fiscal expert Rebekah Young. But even taking a slowdown into account, it looks like Ottawa will be up roughly $20 billion from what officials were thinking last spring in the budget, she says.

So, Freeland will have some choices to make before the fall economic statement. (Yes, there’s an update in the works. No, they haven’t formally set a date yet.)

Even as Ottawa is rolling in cash, at least three major forecasters are projecting a mild recession in early 2023.

Even those who don’t see a recession expect some confusing and unpleasant times ahead, with higher interest rates taking their toll on consumption. Inflation seems to have peaked, but prices are still rising by lots, and wages have not been keeping up.

The Conservatives and their new leader, Pierre Poilievre, have wasted no time pushing hard on their preferred solution. They’d see the Trudeau government cancel planned increases to Employment Insurance premiums, Canada Pension Plan premiums and the carbon tax.

But that hearkens back to the British experience and the immediate condemnation of markets and analysts alike. The “trickle-down” theory that such tax cuts will spur economic growth has long been discredited. In the U.K., the concern is the measures will simply drive up the debt, fuelling even more inflation, and prompting interest rates to climb higher yet again. The market reaction is cementing that course in place.

But taking the opposite approach — stimulus spending — is fraught as well.

Of course, traditional economics tells us that stimulus can help an economy recover from recession. And the Liberal temptation will be to spend the windfall — something Justin Trudeau’s finance ministers have done over and over again.

Indeed, many of the provinces are doing just that as they see their coffers overflow with the taxes from inflation profits and exuberant consumer spending.

The federal Liberals, in conjunction with the NDP, are already heading down that road, with their $5-billion package of dental care for kids, support for low-income renters and a temporary doubling of the GST credit.

But Freeland has also made a point of wanting to do no harm, signalling repeatedly that fiscal restraint is in the cards in the name of whittling down the deficit and not exacerbating inflationary pressure. The $5-billion package includes $3 billion in new well-targeted spending that probably won’t make inflation much worse. But further stimulus spending is another thing

Finance Minister Chrystia Freeland is in an interesting position right now, with corporate profit galloping ahead of the Finance Department’s wildest dreams

altogether. She’ll have to decide if she wants to ignore the potential inflationary impact and spend even more in the name of softening the blow, aiding the recovery and scoring political points.

But there’s a far stronger case for allowing the slowdown to take its course without Ottawa trying to mitigate. For one, unemployment is at historic lows and there’s actually a shortage of many kinds of workers right now. So we start from a good place on the jobs front.

Plus, Employment Insurance is there to back up those who lose their jobs. It needs reform, and Trudeau has committed to doing that. Right now would be a good time, especially if we’re going to be turning to EI more and more in the coming months.

“This pullback is basically a function of (monetary) policy tightening to combat inflation. An easing in fiscal policy would be counterproductive and may require even higher interest rates, as they are discovering in the U.K.,” Doug Porter, chief economist at Bank of Montreal, tells the Star.

But just in case the downturn is worse than expected, or hammers one group of people particularly hard, Freeland could consider narrowly-targeted supports, he adds.

That’s wise advice. After all, she does have the money on hand.

BUSINESS

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2022-09-27T07:00:00.0000000Z

2022-09-27T07:00:00.0000000Z

https://torontostar.pressreader.com/article/282127820350047

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