OTTAWA – Newly released documents show Prime Minister Justin Trudeau was given warnings about the complexity of plans to “build back better” from the pandemic that could lead to economic uncertainty.
The idea of strengthening economic shortfalls unearthed by the pandemic has become a rallying cry for Canada and many of its allies, such as the United States.
While there is a heavy focus on strengthening battered supply chains and building domestic capacity to produce essential goods, “build back better” also aims to address digital and green economic shifts accelerated by the pandemic.
The prime minister’s briefing binder notes that governments looking to “build back better” could create “uncertainty about rule and standards, create market distortions, and generate less of an even playing field.”
The document also highlights the combined effect of higher government debt loads, inflation and rising interest rates that could hinder “build back better” efforts.
The documents were released to The Canadian Press under the Access to Information Act, just ahead of Friday’s closure of consultations on this year’s federal budget.
Finance Minister Chrystia Freeland is being asked to spend on all manner of requests laid out in some 500 submissions to the House of Commons finance committee, that show at least over $300 billion in specific asks.
Billions more are hinted at in submissions that ask for significant, though not specific, funding for various initiatives.
Several submissions ask the government to rein in the deficit, which the Finance Department projects to be $58.4 billion for the fiscal year that starts in April before any new spending promise in the budget.
There are also requests to cut billions in spending on things like a national child care system, or increase corporate tax rates to boost revenues and to deal with a debt forecasted to hit $1.2 trillion this fiscal year.
Trudeau was told higher debt levels will generally constrain governments’ ability in “addressing social priorities and responding to future crises.”
The Business Council of Canada, which represents the country’s largest employers, is among the groups urging caution on spending plans, saying anything that doesn’t help with long-term growth could hurt Canadians by fuelling already high inflation.
When it comes to “build back better,” the council suggested working in even closer lockstep with the United States to prevent protectionist policies that have percolated with greater intensity after protesters blockaded key border crossings.
The economy, by most metrics, is also running at capacity. Too much spending in the near-term could add fuel to headline inflation rates that are at three-decade highs.
“Fiscal actions — real or perceived — that stoke inflationary pressures could make matters worse,” said Rebekah Young, Scotiabank’s director of fiscal and provincial economics.
“Lower income households tend to feel the effects more so than higher income households, so caution is warranted in cloaking further stimulus measures in ‘affordability’ terms.”
When Trudeau received his briefing binder from the Privy Council Office, the Bank of Canada was expected to start raising its trendsetting interest rate this year to combat inflation rates that had steadily risen.
“The potential for higher inflation and interest rates would also be unfavourable to large-scale investments, perhaps especially in the type of projects envisioned in a green energy transition,” officials wrote in the document.
A plan to prod large-scale investments and long-term growth is not easy to craft because of how comprehensive and reliant it must be on businesses and allies like the United States, said Robert Asselin, the Business Council of Canada’s senior vice-president of policy.
He said the government needs to consider more long-term spending ideas, lest it focus too much on the near-term and fuel inflationary pressures.
“It could put the electorate in a place where this government would not be seen as being responsive, either on inflation or on growth coming out of the pandemic, which I think would put this government in a very difficult situation,” said Asselin, Trudeau’s former budget chief.
Young said there are other actions the government could take in the budget that don’t require new spending, such as tax and regulatory reforms that sprinkle the pre-budget submissions to the Commons finance committee.
A broad spending review, also asked for by several groups, could better prioritize public funds and prod business investment needed to meet the government’s goals to build back better, Young said.
“It is now up to policy-makers to foster a credible and growth-friendly policy landscape ahead,” she said, adding there is no shortage of uncertainty at present and government actions shouldn’t be part of that.
This report by The Canadian Press was first published Feb. 25, 2022.
— With files from Jim Bronskill