Economy needs bigger deficit spending, David Rosenberg advises Ottawa
Gluskin Sheff economist tells Ottawa now is the time to spend, not worry about balanced books
Ottawa should not be afraid to spend a lot of money it doesn't have quickly in order to give the economy a shot in the arm, an influential economist says.
That was the gist of a note Thursday from David Rosenberg, the chief economist and strategist at Toronto-based money manager Gluskin Sheff Inc.
During the recent election campaign, the Liberals ran on a pledge to run "modest" deficits in the $10-billion range for the next few years, in an attempt to stimulate the economy.
But Rosenberg says more drastic measures are warranted, noting that Ottawa could run deficits of up to $24 billion a year all the way until 2020 and still be below the average 70 per cent debt-to-GDP ratio among OECD nations.
Canada's debt-to-GDP ratio currently stands at 31 per cent.
"What is Ottawa waiting for?" Rosenberg wrote.
"If the government wasn't spending years strengthening our nation's balance sheet to use it as a weapon against downside economic risks as is the case today, then what was the point of it all?"
Rosenberg says it is time for the federal government to get off the sidelines and start "fighting the economic forces" instead of leaving the heavy lifting to the Bank of Canada, in the form of monetary policy.
Twice last year, Canada's central bank cut its benchmark interest rate in an attempt to stimulate the economy. A growing number of economists think the bank may do the same next week, and move its key lending rate to 0.25 per cent.
That may marginally help some needy parts of the economy, but simultaneously spurring more consumer debt. That's why Rosenberg says it's the politicians' turn to act now.
"My message to the new government is to begin to fight the economic forces with fiscal policy and stop this multi-year strategy of having the Bank of Canada shoulder all the responsibility via the currency, which is a double-edged sword."
Deficits have worked before
There's historical precedent for his rationale. Rosenberg credits the Mulroney government in 1986 with allowing the annual deficit to rise to $36 billion with setting the table for the economic expansion that followed. "Fiscal policy under the Mulroney regime was appropriately loose and helped pave the way for the boom in the late 1980s," he said.
Ottawa is also in much better shape today, he says, because if interest payments are stripped out, Ottawa actually has a primary budget surplus of $28 billion. In 1985, that was a deficit of $12 billion.
And back then, Ottawa was spending nearly 20 per cent more on programs (excluding interest) than it earned in revenues from the economy. Today, Ottawa only spends 90 cents of every dollar it brings in from revenues on programs (again, when interest payments are stripped out.)
"In other words, fiscal policy is far too tight in view of the challenges ahead," he said.
The problem with relying on the Bank of Canada to cut rates is that it is devastating to the loonie. The Canadian dollar is currently below 70 cents US for the first time in 13 years and some are even forecasting a 59-cent loonie this year. That should eventually help parts of Canada's economy, but at a heavy cost for importers, snowbirds, and Canadians overall because he says it is "akin to the country accepting a national pay cut."
"Now you know why the Canadian dollar is also known as the 'loonie' — it is a diving bird, one that is more prone now to sink than to float," Rosenberg said.
Infrastructure funds coming
There's evidence that Ottawa may be planning on doing exactly what Rosenberg recommends. Word broke on Wednesday that the Trudeau government is "actively considering" speeding up promised investments in infrastructure in a bid to stimulate Canada's rapidly deteriorating economy.
Ottawa says it is going to focus its spending on infrastructure projects, to the point that they may speed up their spending plans on worthy projects.
Prime Minister Justin Trudeau said Wednesday that his government wants to make sure it's spending money "on the right things" to create jobs and spur the economy in the short term, but also in the long run.
"We're going to do this right, we're going to do this responsibly."