Chrystia Freeland rejects critical report, says Canada has economic ‘strength’

HAMILTON—Faced with warnings of a possible recession, stubbornly high inflation and still-rising interest rates, the Liberal government sought Tuesday to reassure Canadians it will keep its big-ticket promises as well as get its fiscal house in order.

Prime Minister Justin Trudeau breezed past reporters, refusing to take questions on his way into a daylong federal cabinet meeting where the economy dominated the agenda, on the morning after a few dozen anti-government protesters bellowed, honked and shot off fireworks over the Hamilton hotel where the Liberal ministers gathered.

Within the federal cabinet, on the eve of what many expect will be another Bank of Canada interest rate hike, slightly differing views appeared to emerge Tuesday of what tougher economic times could mean in the months ahead for the policy choices of lawmakers.

Associate Finance Minister Randy Boissonnault said while budget plans are still on track, the fiscal picture for the government’s taxing, spending and borrowing plans has “tightened.”

He pointed to the war in Ukraine and the impact of inflation as major economic challenges, and said 2023 is “a turbulent year. There’s lots of uncertainty.”

Finance Minister Chrystia Freeland did not utter the word “recession,” but acknowledged there is “a lot of volatility in the global economy.”

Still, she insisted the government has already accounted for that uncertainty in its long-term spending and borrowing plans unveiled last spring and in the fall economic update.

And she insisted it will achieve its policy goals, calling health care and supporting the transition to a “green” economy pressing priorities.

Trudeau is expected to announce Wednesday that a first ministers’ meeting on health care will be held in Ottawa, likely in the week of Feb. 6, with Feb. 8 floated as a possible date. At that meeting, leaders are expected to nail down details of billions in new spending to increase the Canada Health Transfer to provinces and territories, as well as how much more money would be on offer through bilateral agreements with provinces that agree to spend it on areas of shared priorities like national data collection, mental health and long-term care services.

The Liberals’ ambitious public policy promises include those as-yet-unbudgeted billions in spending to put federal health transfers to provinces on a stable footing, and efforts to decarbonize the economy and tackle climate change.

“Those are significant fiscal pressures,” Freeland acknowledged.

She noted many provinces are also in strong fiscal positions, with several close to or having balanced their budgets.

She suggested that while the federal government respects health care as an area of provincial authority, with that authority comes “responsibility.”

“I think Canadians quite naturally and appropriately expect provinces to use that fiscal capacity to support the health-care systems that all of us depend on.”

But Freeland said the federal government still intends to deliver on campaign promises to boost mental health, home and long-term care, and to recruit more doctors and nurses, and it will not change course on industry subsidies to support the transition to a greener economy.

“This is a once-in-a-generation moment,” said Freeland, “and either Canada’s seizes that opportunity, seizes our share of the new industrial global economy which is being built or we get left behind.”

The finance minister flatly disagreed with and pushed back against a report released Monday by former Bank of Canada governor David Dodge, and Robert Asselin, a former finance policy adviser to the government who is now with the Business Council of Canada.

They wrote that the Liberals’ budget plan is “unlikely” to work, given its evolving, ambitious political promises, higher global interest rates and the “high likelihood of a more severe recession in 2023.” They also pegged a potential $60 billion in additional spending needed to meet the government’s policy goals.

But Freeland insisted Canada enters the coming uncertain period in a “position of strength” with strong labour force participation, the strongest economic growth rate in the G7 in 2022, the lowest deficit and the lowest debt-to-GDP ratio.

She insisted her confidence was not merely a political calculation but was based on an average of forecasts produced by independent private sector economists the government consulted.

Still, many economists are now warning of a significant economic slowdown, if not a recession, in 2023.

Freeland conceded there are risks.

“We do not know for sure how the COVID recession is going to finally play out, and we do have the reopening of China as a new international — I won’t call it a wild card but a source of real uncertainty. Could be upside, could be downside, maybe a little bit of both,” she said.

Freeland spoke after a day of cabinet briefings by finance officials as well as UBC economics professor Kevin Milligan and former Bank of Canada deputy governor Carolyn Wilkins, now a senior research scholar at Princeton University.

“The likely scenario is we hit a soft spot in the economy,” said Milligan. “That’s going to impact interest rates, can impact inflation, it’s going to impact government revenues and the budget situation.” At the same time, he said, governments still need to address long-run challenges like an aging workforce.

But in the face of an economic slowdown, he said, policymakers should ensure “the Employment Insurance system is ready,” and think about whether there should be “another round of income transfers to lower-income folks in a targeted way.”


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