BUSINESS

Stephen Poloz Subtly Tells Justin Trudeau To Run Deficits

12/10/2015 04:49 EST | Updated 12/10/2015 05:59 EST
CP

  • Government spending more effective than rate cuts, Poloz says
  • Trudeau hints at larger deficits
  • BoC, feds no longer working at cross-purposes

As governor of the Bank of Canada, Stephen Poloz is expected to keep an arm’s length distance from elected officials, and not to give direct advice to the prime minister or finance minister.

But there’s nothing stopping Poloz from expressing his overall views on government spending and the economy. Which is what he did Tuesday, in a speech to the Empire Club of Canada in Toronto.

And what Poloz said, in essence, is that in a low interest rate situation like the one we have, government spending is a more effective tool to stimulate the economy than anything the Bank of Canada can do itself.

“The effectiveness of monetary policy [i.e. interest rate changes] has its limits once interest rates reach very low levels,” Poloz told his audience.

“As [economist John Maynard] Keynes noted as he watched the Great Depression unfold, fiscal policy [i.e. government spending] tends to be a more powerful tool than monetary policy in such extreme circumstances.”

John Maynard Keynes was the ultimate “tax-and-spend liberal,” a true fan of deficit spending to stimulate the economy. So just citing Keynes was a powerfully symbolic act on the part of the Bank of Canada chief.


source: tradingeconomics.com

Simply put, Poloz was saying that the ball is (or at least should be) in Trudeau’s court.

Trudeau seems up for the challenge. He campaigned on a promise to end the austerity of the Harper era and run a deficit of $10 billion to get the economy moving amid an oil price slump.

Now it appears Trudeau and Finance Minister Bill Morneau may actually be preparing to run even larger deficits. At a press conference Wednesday, Trudeau described keeping the deficit to $10 billion as a “goal.”

“We put forward $10 billion as the goal that we were looking to keep for modest deficits,” he said, as quoted at the National Post.

“But at the same time, we committed, on an ongoing basis, to keep you apprised if the situation worsened.”

Trudeau said the previous Harper government’s forecasts of budget surpluses were “wildly optimistic” and added that “things have gotten significantly worse from those rosy projections” made earlier this year.

With Trudeau’s plans for deficit spending evidently going forward, the Bank of Canada’s policies and the federal government’s policies may finally be on the same page.

Many economists had argued that under the Harper government, the central bank and government spending were pulling in opposite directions.

Poloz slashed interest rates earlier this year to stimulate the economy, but Harper’s austerity budget — designed to bring the federal budget back to suplus — reduced economic activity, economists said, essentially cancelling out the rate cuts.

(H/t: Toronto Star)