IMF report raises concerns over Canada’s fiscal fundamentals

The International Monetary Fund (IMF) walks tall and carries a big stick, so when it pronounces on our national government’s performance in trying to walk tall and carry a big stick in the pandemic, our ears need to prick up.

This year there is much to hear and take to heart for our decision-makers in Ottawa.

The Washington-based IMF annually dispatches economists to Canada to produce a report card under Article IV of its international agreements. Typically we wouldn’t pay much attention – just more international observation about something we know more about locally.

But the pandemic is no time to slough off the tough sledding or the pointed prescriptions.

Last week’s release granted Canada an above-average grade for its initial coronavirus measures but above-average cautions on the path ahead. There are bearable numbers meantime: a 5.4% contraction in 2020, an estimated 4.4% resurgence this year.

The IMF’s good news was front-loaded in a report that dwelled heavily on what has to be fixed to move forward. There is homework to do now, soon and eventually, and what it addresses is not only the product of the pandemic but what long preceded it. There are some fundamentals in disarray.

The immediate IMF direction is to stay the course. Canada took “timely, decisive and well-co-ordinated policy actions in response to the pandemic” and must realize that any economic recovery depends on the evolution of the virus. Until we know more, it says we should be vaccinating quickly, maintaining social contact restrictions and minimizing economic disruptions. 

Fair enough, but then the report starts to list a series of problems substantial in their scope: gaps in our social safety net that deserve a prompt fix, including a review of the employment insurance system as a stabilizer, and the suboptimal productive capacity of the economy that require a hard, long, tough tackle.

“Structural challenges that existed prior to the pandemic remain,” it noted. “Cutting regulatory barriers, reviewing the tax system to improve efficiency, and facilitating internal and international trade should remain on the list of key priorities.”

While the IMF credits the federal government for fostering an inclusive recovery, it makes clear that any new spending needs to be evaluated against broader policies, particularly the challenges in improving our productivity.

It goes so far as to say that the commitment to spend $100 billion – an additional 4% of GDP – over the next three years to support the recovery “needs further justification.” It warns that before the government ramps up its spending again, it will want to ensure that the moves enhance long-term growth.

“While the government still has some fiscal space, the additional spending, if deemed unjustified, could weaken the credibility of the fiscal framework,” it warns.

This is not necessarily a message the Justin Trudeau government wants as it contemplates an election upon which it will dedicate splashy spending as a campaign platform. Finance Minister Chrystia Freeland expressed some glee with the IMF report, but her response suggested her hearing was selective.

The IMF clearly wants Canada – the federal government and the Bank of Canada – to be more predictable in how and when it sets about to stimulate the economy with spending and how and when it takes its foot off the gas pedal. It suggests the consideration of “a more systematic framework of cyclical stabilization” so there aren’t surprise surges in spending or sudden pulls of the plug. Obviously these IMF observers aren’t politicians thinking more about election cycles than economic cycles.

It is the medium term that gets the most pragmatic attention. The IMF notes that the federal fiscal support is “well justified and more support may be needed as the pandemic wanes,” but that “fiscal risks have clearly risen” along the way. It calls on the federal government to “elaborate and clearly communicate its medium-term fiscal objectives.” This is not something this government has excelled at in recent times, even overall, in part because of uncertainty and in part because the deficit is an asterisk in its economic calculus.

The IMF argues for a commitment to a “debt anchor supported by a well-understood operational rule” or “regular publication of longer-term fiscal projections that clearly illustrate fiscal sustainability” as principles upon which the framework is credibly maintained.

And here the IMF takes its eye off Ottawa and shifts it to the provincial capitals, arguing they too need to participate in clear communication of their fiscal objectives, “especially in those provinces with wide deficits and high levels of debt.” It is worth noting this here in case someone in some provincial capital is reading this. My strong hunch is that this is an IMF call into the woods.

What business groups have contended is that Canada’s economic performance obscures underlying competitive shortcomings. The IMF, in sending a few economists north for a visit (even a virtual one), is letting the Trudeau government know that it can’t just punt.

The next federal budget in a couple of months will be a crucial test of its resolve to clarify, communicate and comprehend the fund’s fundamental message. •

Kirk LaPointe is publisher and editor-in-chief of BIV and vice-president, editorial, of Glacier Media.