Monday will mark Chrystia Freeland’s first headlining foray as minister of Finance. The economic statement she will deliver to a socially distanced Parliament amid a deadly pandemic will have to balance the health, economic and political exigencies of an unprecedented moment.

 

Kevin Page

Institute of Fiscal Studies and Democracy, University of Ottawa

November 27, 2020.

On Monday, November 30, 2020 Finance Minister (and Deputy Prime Minister) Chrystia Freeland will deliver her first major financial document to the House of Commons. It has been wryly noted said that you never get a second chance to make a first impression unless everyone in the room was drunk. While pandemic stress may be impacting alcohol consumption these days, Freeland should expect a serious, sober group of parliamentarians.

The COVID-19 virus is infecting and killing more and more Canadians. The second wave is happening. Front-line workers and health systems are under stress. The economy is weak. Vulnerable people are made more vulnerable. Social distancing is stressing us out. Businesses are reluctant to invest. Premiers and mayors have emptied their public accounts. Potential crises loom large and near — be it climate change or another global financial shock. Stakes are high.

As our American friends spend Thanksgiving weekend watching football in a social distance environment, Minister Freeland will be putting the finishing touches to her speech. One can imagine her testing her messaging. Have I convinced myself and Canadians we are on the right policy path? Am I building confidence and hope in the future?

Maybe some of the answers to the doubts can come from the late football legend Vince Lombardi. In the 1968 Super Bowl II, he delivered one of the all-time great pre-game speeches that led the Green Bay Packers to victory over the Oakland Raiders. While acknowledging the hugeness of the moment, he said there was a simple path to victory — forget the ferocity of the opponents, focus on the fundamentals.

In public finance parlance, fiscal updates should be simple documents. In a traditional financial cycle, they are mid-year assessments. Some six months or so after a budget that laid out an economic and fiscal planning framework including policy measures and a fiscal strategy, it is a best practice for governments to provide an update to parliamentarians (who hold the government to account), citizens (who elect representatives) and those nasty bond markets (who buy government debt).

The fundamentals of a traditional fiscal update are simple. Have the economic and fiscal planning assumptions changed? Were there off-cycle (post-budget) measures announced that need to be incorporated in the planning framework? With an updated planning framework (typically a five-year horizon), the government, through the Finance minister, will make the case whether or not government policies are working as planned.

If policy adjustments are needed, a traditional fiscal update would likely signal policy shifts to be outlined in detail in the upcoming budget. In theory and practice, budgets are a more substantive document used by Parliament to incorporate the economic and fiscal policy context while they are debating and approving new legislation requested by the government.

In public finance parlance, budgets and fiscal updates (this one is actually called an “economic statement” due per one popular theory to a desire to avoid the acronym “F.U.”) are focused around numbers and strategy. Numbers on planned or anticipated growth in the economy that impacts revenues and spending programs, and on the path ahead for budgetary balances and debt that signal future borrowing requirements. Strategy on the use of fiscal policy (government revenues and spending) to promote growth, jobs and the full range of public services needed for the common good.

These numbers change as new information becomes available. For example, on December 1, Statistics Canada will release national accounts data for the third quarter. This is critical information for policymakers trying to understand the evolution of the economy since the lockdown in March and April (yes, it will be released a few days after Monday’s Economic Statement).

The 2020 financial cycle is not traditional. The cycle was thrown off course deliberatively by the government and Parliament to address the global pandemic as emergency response suspended the normal fiscal calendar. To paraphrase Gene Kranz from the Apollo 13 mission, our political leaders needed to ‘work the problem’. There was no budget. No planning framework. In its place, there was emergency legislation to speed up the passage of spending authorities necessary to help households and businesses through the economic lockdown.

The spending came at record amounts. In crisis mode, governments were advised by international organizations like the International Monetary Fund (IMF) to “spend as much as you can but keep the receipts.” The 2020 Economic and Fiscal Snapshot tabled on July 8 by then-Finance Minister Bill Morneau largely focused on the receipts. The was no medium-term planning framework. There was some talk of the bridge to the future but no policy agenda or fiscal strategy that went beyond the pandemic. The words of the 54-year-old boxer Mike Tyson seemed apt: “Everyone has a plan until they get punched in the face.” (Tyson will box for charity this weekend).

Fiscal reality got hit hard in the July Snapshot. The 2020-21 budgetary deficit was estimated at $343 billion, almost 16 percent of GDP. The federal debt-to-GDP ratio rocketed to 49 percent from 31 percent the year before. Real GDP was expected to decline 6.8 percent. For bean counters, these are record bad numbers across the board.

For policymakers, the numbers symbolized government efforts to backstop the economy in the face of a novel, highly transmissible virus that was killing Canadians. An economy that lost some $350 billion in GDP over 6 months. A labour market that displaced millions of Canadians in a matter of weeks during the spring lockdown.

Will the Economic Statement/fiscal update to be tabled on November 30^th be an ‘update to a snapshot’ or ‘a mini-budget in disguise’?

The 2020 Speech from the Throne (SFT) gave a clear signal on the direction for the update.

“This fall, the Government will release an update to Canada’s COVID-19 Economic Response Plan. This will outline the Government’s economic and fiscal position, provide fiscal projections, and set out new measures to implement this Throne Speech.”

Fall updates that look like mini-budgets are not unprecedented. Recent fall updates have included new measures but they were hard-linked to a budget with a fiscal anchor. They set out a full, medium-term planning framework so that parliamentarians, citizens and bond markets could better understand the strategy and new policy initiatives in the context of policy challenges and budgetary constraints.

The July 2020 Economic and Fiscal Snapshot provided two-year (average private sector) economic estimates and in-year fiscal estimates. It was an economic response plan to a pandemic. Short-term focus.

Thanks in part to the SFT, the 2020 Fall Economic Statement is being set up to stretch the economic response plan into a partial economic recovery plan (but not a full recovery plan). It is a little like the song from the Barenaked Ladies, “If I Had a Million Dollars”: “… I’d buy you a fur coat, but not a real fur coat, that’s cruel.” Partial recovery plans can be cruel because they will not address the full range of challenges facing a post COVID-19 economy including growth, inclusion, resilience and sustainability. They can create confusion about priorities, trade-offs and fiscal sustainability.

It is a good bet the government will punt a full recovery plan until the next budget.

In this update, expect to see short-term (2 year) economic and fiscal projections, just long enough to launch new spending highlighted in the SFT: COVID testing and vaccine distribution; infrastructure; focused health and long-term care; social housing; food insecurity; job training; Youth Employment and Skills Strategy; women’s entrepreneurship; targeted business supports, and more.

The prime minister has indicated that the government will not set a medium-term fiscal anchor in the middle of the pandemic. More expensive reforms related to child care, pharmacare, and basic income supports would need a longer-term budget context with likely need for additional tax revenues.

Let’s return to the football analogy. Minister Freeland is facing a fierce opponent — a global pandemic. The path the government has chosen to address the pandemic is not a simple one. There is a reluctance to outline plans that extend through the pandemic and into the recovery. She may endeavour to turn this Economic Statement into a mini-budget and to stretch the economic response plan into a partial recovery plan without appropriate fiscal anchors. These are tough times. It is a tough job.

Kevin Page is founding president and CEO of the Institute for Fiscal Studies and Democracy.