Terence Corcoran: The Bank of Canada should stick to its knitting and stay out of budgets
Governments across Canada have reason to think they have an official green light to spend big and run up deficits. The man operating the traffic signal: Bank of Canada Governor Stephen Poloz. From Ottawa’s deficits to Ontario’s childcare plan to big pension spending on infrastructure, politicians can now turn to Poloz as an independent authority for approval.
By flashing that green light, however, Poloz has inappropriately set the Bank of Canada into a new role as ideological think tank, a role that is way beyond the bank’s official mandate — monetary policy — and well outside its traditional informal role as a guide to the state of the economy.
Ontario’s pre-election budget plan Wednesday projected deficits of $31.9-billion over six years leading to a new debt projection of $348-billion may not be precisely what Poloz had in mind when he spoke earlier this month about the benefits of more government debt and spending on childcare. As the Toronto Star reported at the time, Poloz said Ottawa’s run up of public debt has helped the economy. If it works when Ottawa does it, then Ontario can rightly claim to be on the right track.
Deficits and debt are good for the economy. That has been Poloz’s message for a couple of years. In 2016, he endorsed the Trudeau government’s spending and deficit plan. “Canada,” he said, “is in a very good fiscal situation so we shouldn’t worry about that (deficits) at this time.” As if picking up the cue, Finance Minister Bill Morneau kept up spending and continued to plan for deficits for years to come.
The Bank has also endorsed Ottawa’s infrastructure financing plan, specifically the use of “private” pension plans to fund the spending. The argument, sound from a general economic perspective, is that the economy needs infrastructure and such spending helps boost demand. So far, though, the Trudeau government, while spending money on many things, has failed to deliver on infrastructure.
Bank of Canada officials have dipped into other policy issues that are not areas that would normally draw central bank attention. The biggest dip occurred when Poloz waded into the childcare policy area with what amounted to a full endorsement of Quebec’s universal childcare program.
Addressing the female participation in the economy gap, Poloz delivered comments implying all of Canada should follow Quebec. “History suggests that this gap can narrow,” said Poloz. “Consider Quebec, where, 20 years ago, the prime-age female participation rate was about 74 per cent. The provincial government identified barriers keeping women out of the workforce and acted to reduce them, particularly by lowering the cost of childcare and extending parental leave provisions. Within a few years, proportionately more prime-age Quebec women had jobs than women in the rest of Canada. Today, Quebec’s prime-age female participation rate is about 87 per cent.”
To make his point, Poloz engaged in some simple arithmetic: “If we could simply bring the participation rate of prime-age women in the rest of Canada up to the level in Quebec, we could add almost 300,000 people to our country’s workforce.” The arithmetic might be good, but the economics would be another matter. No studies were cited to support the theory that universal free childcare was the direct cause of women working more in Quebec. Also missing is research into the economic effect of higher taxes paying for childcare.
Poloz’s enthusiasm for child benefits also appeared last July, when he waxed enthusiastic about Ottawa’s child benefit program, saying it has been “highly stimulative” to the economy. “You can see that in the consumption figures. So we would not be where we are today if that had not occurred. We would be waiting longer for the output gap to close than later this year as we suggested.”
The logical conclusion to be drawn by all politicians across Canada is that more government spending on children and infrastructure and just about anything else is good for the economy, boosts growth and creates jobs —even if it does run up deficits and debt that will have to be repaid later at higher interest rates. So long as it looks manageable.
Is this the right role for the Bank of Canada, which is charged by the Bank of Canada Act with tracking inflation and setting monetary policy? It suggests, among other things, that the governor is getting a little too cozy with the finance minister, with whom he meets regularly.
More problematic is the risk that the Bank could lose some of its independence, considered essential to the proper function of a monetary authority. Its business is inflation targeting, interest rates, money supply and financial stability, rather than encouraging social policies and deficit spending that are designed to win elections for politicians, but can – in time – wreak havoc with monetary policy.