Jan 25, 2023
Freeland faces big spending demands and darker economic outlook
It's the right decision for the Bank of Canada to hike by 25bps today: Andrew McCreath
Prime Minister Justin Trudeau’s finance minister is facing significant pressure to spend more on clean-energy subsidies and health care, even as a possible recession looms.
Chrystia Freeland, speaking Tuesday at a cabinet retreat ahead of parliament’s return next week, said she’ll “continue to take a fiscally prudent approach” as the government prepares its budget for the fiscal year that begins April 1.
She reiterated a promise not to stoke inflation that could force the Bank of Canada to raise interest rates even higher, but also acknowledged that spending requests are mounting.
The energy industry is seeking billions in public funding for carbon-capture projects to help meet emissions targets and keep Canada competitive as the U.S. rolls out green subsidies under the Inflation Reduction Act.
“This is a once-in-a-generation moment,” Freeland told reporters in Hamilton, Ontario. “Either Canada seizes that opportunity, seizes our share of the new industrial global economy which is being built, or we get left behind.”
Provincial governments, meanwhile, want billions to help patch up Canada’s health-care system. A major increase in federal health payments to provinces may knock the government off the path it mapped out for balanced books within five years.
Trudeau said Wednesday at an event in Hamilton, Ontario, that his government will meet the nation’s premiers in Ottawa on Feb. 7 for a working meeting on health care. The gathering will be used to establish frameworks on data and health information and to start work on bilateral agreements with the provinces, he said.
The prime minister said his government will be able to help Canadians through the current turbulent environment while maintaining the country’s fiscal health and without undercutting the Bank of Canada’s efforts to fight inflation.
“By being targeted in our supports and by making the kinds of investments that are going create sustainable economic growth for years to come, we can support Canadians without endangering the track that the Bank of Canada has put us on to reduce inflation,” Trudeau said.
Freeland, for her part, has conceded that helping industry and repairing the medical system, while keeping total spending in check, are “challenging things to do at the same time, and that’s the balance we’re going to have to find in the budget.”
She also acknowledged that Canada, like other advanced economies trying to tame inflation through higher interest rates, could face significant challenges in the coming year.
“We still do not know for sure how the plane is going to land,” she said. “We do not know for sure how the COVID-19 recession is going to finally play out.”
Earlier Tuesday, cabinet heard a presentation on the economy from a panel including Carolyn Wilkins, the former No. 2 at the Bank of Canada, and University of British Columbia economics professor Kevin Milligan.
Speaking to reporters outside the meeting, Milligan said the government should exercise caution on spending while the central bank works to bring inflation down.
“If you go too far too fast, the Bank of Canada is going to simply ratchet things up and make the interest rate environment more challenging,” he said.
But he added that increased health care spending would likely be rolled out over many years — and therefore wouldn’t hurt the short-term inflation outlook.
Still, Wilkins warned that Canadians may be in for some pain in 2023 as the economy slows and unemployment rises, which she said is necessary to bring prices to heel.
“Whether or not we’ll have a hard landing is something that no one really knows,” Wilkins said. “But I wouldn’t rule it out.”