Vaccine distribution is the best possible thing Ottawa could do for the economy: Economist
Ahead of the federal government tabling its first budget bill in more than two years, BNN Bloomberg asked five Canadian economists what should be included and what should be left behind.
Here are their answers:
What do you think is the single most important thing the government should include in this year’s budget?
Rebekah Young, Scotiabank: A large, temporary spending package is a foregone conclusion. Given they are going to spend, a bold and ambitious set of policies to turbocharge business investment could pay dividends for years to come. For example, Scotiabank is proposing a temporary matching grant for businesses that undertake new investments over the course of the recovery. Parameters of the grant could be tweaked to reinforce other policy objectives.
Doug Porter, BMO: I believe the most important thing to include in this budget is a reasonable plan to exit this period of extreme budget deficits. I don’t think it’s critical to set out a plan to balance the books, but we need to get the deficit down to much more manageable levels as the economy recovers.
Jack Mintz, University of Calgary: Deal with the COVID economy, continuing support until we get herd immunity. More focus on business recovery is key.
Benjamin Tal, CIBC: I think it will be a light budget with not too much in it. The most important issue is more clarity on the additional $70-$100 billion spending (that was alluded to in the Fall Economic Statement), as well as information about financing any long-term increase in spending on things such as a universal day care system and more clarity on what benchmark they will be using for debt level.
Derek Burleton, TD: Amid a third wave, much of the budget's focus will be on providing further support to the hardest hit households and businesses. I think that we're far enough along in the recovery for the government to provide more detail on its long-term policy goals. This would involve going beyond the notion of 'fiscal guardrails' discussed in November's update to laying down markers with respect to longer-term debt-to-GDP, debt service ratio or another metric.
What do you think is the most tempting thing that the government should actually leave out of this year’s budget?
Young: The government should be wary of further broad-based stimulus measures that would spur short-term demand. That said, even though headline numbers are strong, there are still pockets of Canadian households and businesses that are hurting. Support to these Canadians should be highly targeted, temporary and coupled with policy programs or reforms to address any underlying structural issues.
Porter: I believe that Ottawa should have a serious re-think of the plan to inject an additional $70-100 billion of net new stimulus on top of what they have already delivered. There are already plenty of signs that demand is already plenty strong, and the most straightforward way of driving the recovery is simply to allow the economy to re-open, safely.
Mintz: New redistributive programs like pharmacare, long-term care, childcare and universal income right now are expensive. The first task is to get the economy back on track with sustainable economic growth – instead of 1.5 per cent per year; we need to do much better at two or 2.5 per cent to have enough taxes to pay for new social programs. Right now, with lockdowns and an expensive energy transition, not everything is affordable in terms of tax revenues, today and in the future.
Tal: I’m not sure but any discussion on tax changes can wait.
Burleton: In its Fall Economic Statement, the government proposed an additional $70-$100 billion to "jumpstart" the recovery over the next few years. However, with the economy enjoying a better-than-expected rebound, the case for this temporary stimulus has been weakening. If the government ultimately presses ahead with this spending, it should be dedicated to areas that would likely provide significant long-term growth benefits.
With Canada moving towards a more widespread vaccine rollout, do you believe hoarded savings and pent-up demand from consumers stuck at home will be able to turbocharge the domestic economic recovery? If so, do you believe this should impact the government’s spending plans?
Young: The drawdown of elevated household savings will be a substantial driver of the recovery as confidence strengthens and restrictions are removed. Pent-up demand will likely be particularly strong for services that have been curbed by the pandemic. The government’s spending plans are intended to be calibrated to the recovery so a faster pace of household spending could spur an even faster pace of recovery. With the long lead times for fiscal spending, the government risks overheating near term demand if it pre-commits large stimulus over the next three years without the ability to turn off the taps earlier.
Porter: The large built-up savings will certainly support the economic recovery, and – yes – could lead to at least one quarter of powerful growth. It’s still debatable how quickly this can happen, and the extent to which households will run down their savings. So, some further modest support for the economy may still be needed this year.
Mintz: It will have a temporary effect in the next year. But it won’t turbocharge the economy after a year. In the Speech from the Throne and the Fiscal Update, the government indicated pie-in-sky new social programs “to build back better,” but we need more productivity capacity. We have had a very poor business investment performance, insufficient economic growth, etc., resulting in less money to spend. The focus should be in creating supply – to keep down inflation and improve labour productivity.
Tal: Yes, I believe that private sector stimulus will be very significant and will reduce the need for further public sector stimulus.
Burleton: Yes and yes. Freeland has referred to excess household savings as "pre-loaded" stimulus. And notwithstanding the large upgrades to 2021 and 2022 Canadian growth outlook, most forecasters are imbedding cautious assumptions with respect to deployment of these excess savings. Suffice to say that this represents a notable upside forecast risk that should be factored into government spending plans. It does lessen the need for additional fiscal stimulus relative to what the government had signaled in November.
As Canadian home prices continue to surge, do you think the government should address further housing market policies in this year’s budget? If so, what policies would have the most impact?
Young: Scotiabank believes there is no urgency for government intervention in the Canadian housing market.
Porter: Yes on housing restraints and it doesn’t necessarily have to be in the budget; even earlier moves are welcome. Any measures to try to cool the housing market through the tax system, say a speculative tax, should recycle the revenues into tax relief elsewhere. These suggestions are not meant to be deficit-reduction strategies, but rather ways to tame a wild housing market.
Mintz: Leave to the provinces and municipalities to sort out. Housing is a local issue and conditions differ quite a bit across the country. Federal government should keep its nose out – there is a real need for supply and that requires changes to provincial-municipal regulations.
Tal: I think they should wait until we get a better sense of the sustainability of the boom in housing. Whatever they do should be at the margin.
Burleton: The easy answer to this question is yes. There are plenty of taxes or macroprudential policies that could cool demand and help break the cycle of price increases. The hard question is what specifically should be done, where there is little consensus among policymakers and analysts. In Canada, we are flying in a fog due to a data gap. For all the talk about speculative or investment activity taking over the market, there is a lack of hard evidence. Without the data, it becomes difficult to know how to structure a tax or assess its potential for unintended consequences. Another huge uncertainty exists around to what extent recent trends could naturally reverse once the pandemic eases. Given these uncertainties, the government should tread carefully.
Answers have been edited for clarity.