The moment we have all been waiting for. Okay, maybe that’s just us.
Deputy Prime Minister and Finance Minister Chrystia Freeland will deliver the fall economic statement (FES) tomorrow and many are speculating on the substance of the federal government’s update. The government has been managing expectations, suggesting a focused fiscal and economic update to set the stage for the recovery phase of the pandemic, saving big commitments to be announced in the 2022 Budget. But what is leaving everyone guessing is if and how Trudeau’s government will address inflation in the FES, which follows the renewal of the Bank of Canada’s monetary policy mandate expected today.
During the height of the pandemic, the Bank of Canada took unprecedented measures to stabilize the economy by cutting interest rates and implementing government asset purchase programs – what’s known as quantitative easing. As a result, debt to service COVID-19 related spending became significantly more affordable for the federal government, and they sure took full advantage.
In the 2020 FES, the federal government pointed to their ability to refinance existing debt and finance new debt at record-low rates, stating that Canada was experiencing the “lowest costs of servicing national debt, relative to our economy, in over a century.” The Liberal government argues that they have been cautious with a debt management strategy that locks in low rates for long-term COVID related debt to help reduce exposure to interest rate increases in the future. As inflation raises concerns for economists, government decision-makers and everyday Canadians, Liberals must consider both political and economic risk.
Minister Freeland will surely underscore how rising inflation is a global problem, pushing back against Conservative criticism that Liberal spending has exacerbated the situation. “Just inflation” – as Conservative Shadow Minister for Finance, Pierre Poilievre, so presumptuously puts it – has led Canadians to feel the pinch. Rising interest rates are inevitable and Canadians are left wondering what Trudeau and the Bank of Canada are going to do to get us through the bumpy road ahead.
All of this is looming over the federal government right as they are reviewing the Bank of Canada’s mandate.
The Bank of Canada and the federal government review the bank’s monetary framework every five years and the current mandate is set to expire on December 31. Given rising inflation and impending interest rate hikes, many economists are questioning why this critical new mandate has yet to be released, speculating the delay is a result of Freeland weighing the government’s options on what additional considerations can be prescribed to the Bank of Canada to manage inflation, potentially less rigidly.
The delay could also be attributed to the balancing act the Trudeau government will need to perform until this inflationary period subsides. Providing the Bank of Canada with additional factors to consider beyond a strict inflationary target, could add fodder to opposition accusations that the Liberal government is meddling with monetary policy. Either way, there is a strong narrative that inflation needs to be kept under control, and Canadians and stakeholders may be wondering what implications that has for the federal government and future spending priorities. Canadian government spending may have little impact on the global rise in inflation, but a relentless political attack from the Conservative opposition has the potential to gain traction with Canadians concerned about their pocket books.
The cost of living for Canadians will continue to increase as we navigate this patch of turbulence. Canadians are going to be forced to make decisions about their own spending. And if Canadians are going to be forced to tighten their purse strings, will the federal government be doing the same? Trudeau’s big spending promises and any new spending commitments will require additional borrowing. With rising interest rates and the need for more debt to service big ticket items, government decision-makers will need to be mindful of both the economic and political risk of runaway inflation.