Stephen Poloz says Freeland’s budget ‘exceeded many people’s expectations’

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Stephen Poloz, the former Bank of Canada governor, was pleasantly surprised by Finance Minister Chrystia Freeland’s new financial plan.

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“The budget exceeded many people’s expectations,” Poloz, who retired as governor in 2020, said in an interview with the Financial Post’s Larysa Harapyn this week.

“Of the fiscal room that was on the table, only about half of it was deployed in new programs. The rest was geared towards reducing the debt-to-GDP ratio through time a little faster than it otherwise would, which I think is a bit of a success given the political situation in which we find ourselves in.”

Pause on that last thought. Poloz isn’t keen on the political class these days, so a kind word is noteworthy. It isn’t personal; he has said a politician’s job has become one of the toughest occupations out there. But that degree of difficulty is the problem. He argues in his book, The New Age of Uncertainty, that modern politics is incapable of big things because practitioners have become devoted to polarized vote banks.

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“I believe the coming tectonic stresses will prove too much for the capacity of existing fiscal and monetary stabilization tools,” he wrote. Therefore, given the “political challenges” that will impede an overhaul of existing policy, “policy-makers will not be able to absorb all of the increase in risks that the tectonic forces will deliver.”

Poloz finished his book last year. His outlook was informed by the presidency of Donald Trump in the United States and an embrace of “vote efficiency” in Canada, where Prime Minister Justin Trudeau’s Liberals formed successive minority governments despite losing the popular vote. Little positive was achieved by policy-makers in either country. The kind of compromise required to bring about anything more than incremental change was incongruous with electoral strategy.

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Team Trudeau will need more than one relatively well-received budget to restore its credibility with the business community. But maybe Russia’s invasion of Ukraine has brought a new level of seriousness. Trudeau’s power-sharing agreement with the New Democratic Party promises several years of stability, which would at least partially offset the political risk that has weighed on investment in recent years.

Executives and investors might dislike some of the terms of the arrangement between Trudeau and NDP leader Jagmeet Singh, but at least they can base their spending plans on the assumption there won’t be a disruptive federal election every couple of years.

To be sure, the new budget is far from perfect. If the most pressing short-term issue is inflation, then Freeland probably should have used more of her revenue windfall to narrow the deficit. Her act of relative restraint “doesn’t change the fact that this year and next year, we’re running fairly important deficits, more than one per cent of GDP, closer to two per cent of GDP, at a time when the economy is fully engaged, more than fully perhaps, in excess demand already,” Poloz said.

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“To the extent the government actually gets that spending out the door, it’s adding to those (inflationary) pressures on the economy this year and next. It would be better if that wasn’t the case.”

Still, the former governor acknowledged that some of Freeland’s policies could help offset inflation by making more workers available to fill an unusually large number of vacancies. For example, the national daycare program should boost the labour participation rates of women. Poloz also said the federal government’s pledge to speed up the processing of visa applications and the overhaul of the Temporary Foreign Workers program will help with a labour shortage that threatens to stoke inflation by putting upward pressure on wages.

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“Inflation risk is a demand and a supply issue,” he said. “These are the folks that will take up the excess vacancies we have in the labour market. That will take some of the inflation pressure out of the system.”

Something else that would offset inflation is stronger productivity. Freeland’s answer is the Canada Growth Fund, which she intends to seed with $15 billion for a team of professional investors to use to cajole private investors into making big bets on Canada.

Poloz, who was running Export Development Canada when he was appointed Bank of Canada governor, said the scheme could work, although only if the politicians ultimately get out of the way. Trump’s protectionist policies reoriented North American investment to the U.S., as companies concluded it was the only way to avoid tariffs on imports from Canada or Mexico. Now, those companies are thinking about where they will expand to take advantage of post-pandemic growth.

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They might need the kind of “catalyst” that a $15-billion fund could provide, Poloz said. Still, “that’s going to take some heavy lifting,” he said. “You can’t just put that up in the window and expect everything to happen. It will require a lot of dialogue and you’ve got to make sure that companies not only have that, but have clarity that if they make a 10- or a 20- or a 30-year investment today, it will still be valid 10 years from now.”

The Liberal-NDP deal should bring at least a few years of clarity. Inflation will become less scary if the country’s business and political leaders use that time wisely.

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