Mary-Jane Bennett

November 27, 2022

On November 22nd, Massey College hosted a conference: Responsible Economics: Are Canadian Fiscal and Monetary Policies Appropriately Aligned? Panelists looked at ways to get Canada out of the spiraling debt and inflation crisis. Time is running out to avoid a painful recession — and the job losses, business closures and lost opportunities that would come with it.

The problems facing us are serious: massive public and private debt, supply shocks created by Russia’s war with Ukraine, high food prices, and China’s ongoing COVID-19 lockdowns.

The source of the current discomfort is no mystery. To help workers and business hurt by pandemic lockdown measures, Ottawa borrowed, then gave away more than $700 billion, starting in 2020. While the Bank of Canada’s bond purchases were a necessary backstop to avoid a run on the bond market, Canadians spent freely, driving up the cost of everything from lumber to groceries to medical supplies. In just two years, commodity prices doubled, according to an RBC analysis. Canadians had meanwhile piled on unprecedented levels of debt during a prolonged period of ultra-low interest rates. In October, Canada’s annual rate of inflation stood at 6.9 percent.

Whether Canada has the appropriate fiscal and monetary policies in place to meet the challenging road ahead was the focus of the conference.

In the November fiscal update, Minister of Finance Chrystia Freeland forecast government deficits returning to normal levels by 2024 with a decrease in the debt-to-GDP ratio. For its part, the Bank of Canada anticipates a return to normal inflation within the 1-3 percent range by 2024. Both positions align with International Monetary Fund reports suggesting that advanced economies can expect a return to pre-pandemic projections by 2024; the situation is worse in developing countries.

William Robson, CEO of the C.D. Howe Institute told the conference that the country should expect a bumpy road ahead. While the Bank of Canada pumps the “brakes “ on liquidity, he said, the “foot is on the accelerator” on fiscal spending. Global problems worsen the situation.

Ongoing disruptions in grain deliveries caused by the war in Ukraine are leading to frightening shortages in Ethiopia, Nigeria, Egypt and elsewhere. Last month, Russia suspended its participation in the UN-brokered deal to facilitate the export of cereals; whether Moscow will continue to allow grain vessels to depart the Black Sea is “unguaranteed,” a spokesman said. Gas prices meanwhile remain volatile. Europe is looking to distant suppliers of LNG in Asia at a time when Russia is redirecting European crude shipments to China and India, moves that are sure to further drive-up shipping costs. Price pressures continue their steady climb. Wages are also rising. And the strong consumer demand stoking the inflationary fire shows no sign of letting up.

Conference panelists took up the perplexing challenge now facing Tiff Macklem, Governor of the Bank of Canada: how to get inflation back to within the two per cent target rate without triggering a recession? So far, Macklem’s aggressive efforts to constrain the economy appear to have had little effect. Further rate hikes appear likely.

Steep inflation is already biting into workers’ purchasing power. If both high interest rates and inflation persist, doubts in the government’s ability to end these pocketbook strains will begin to creep in. People’s belief in their economic future affects wage bargaining in the same way as does the price of things.

A recession beginning in 2023 is looking likely, according to most major Canadian banks and former Bank Governor Mark Carney. The steady rise in interest rates could cause Canadian businesses to lose confidence in the economy, stalling growth, and triggering layoffs.

The central bank cannot fight this battle alone. Minister Freeland’s fall update included a tax on share buy backs—which boost share prices but do not create real value for a corporation. The update’s priority message, however, was tax credit incentives to support clean energy, explaining that: “Canada will need to do even more to secure our competitive advantage and continue creating opportunities for Canadian workers.”

But the current business tax regime is also raising competitive and labour concerns in sectors other than green energy. Tax depreciation laws in other sectors need updates. The stock of business capital per available worker in Canada has been falling, says Robson, threatening the ability of Canadian workers to compete globally. Data shows that Canadian workers saw just 29 cents of new investment for every dollar invested in US workers.

Not having the right tools to compete tends to lower productivity and erodes a company’s strength. When capacity stalls, monetary solutions tend to falter. Canada’s industries need improved, market-driven policy alternatives to help them compete on the global stage.

Ottawa could also consider reimagining the current formula for equalization, the federal transfer program for addressing fiscal disparities among provinces. This could include programs aimed at speeding recovery in those provinces that risk being hard hit by recession. These ideas were taken up by panelist Mary Janigan, author of The Art of Sharing: The Richer versus the Poorer Provinces since Confederation.  Janigan notes that the “hardheaded bargain” that pushed Ottawa and the provinces into a “skein of calculated trade-offs” is up for renegotiation in 2024.

In The Art of Sharing,  Janigan highlights social programs the federal government deployed in previous recessionary periods. In 1957, for example, Prime Minister Louis St.-Laurent paid for social assistance — normally a provincial responsibility — for laid off workers who had depleted their unemployment benefits.

There are also solutions to be found in clamping down on the colossal amounts of dirty money currently being laundered in Canada, the focus of speeches by Toronto Star investigative journalist Robert Cribb and myself. The Criminal Intelligence Service of Canada estimates that as much as $133 billion per year is being laundered in Canadian real estate and other ventures, salted away from tax and other government authorities, resulting in millions in lost revenue.

In British Columbia right now, one of every five real estate transactions is a cash deal, according to a recent expert panel on the topic; and one in ten mortgages are held by private lenders, who are not subject to money-laundering reporting rules.

In 2018, the New York Times determined that half the most expensive homes in New York were held by shell corporations. Following their reporting, the US Treasury ordered title insurance companies to identify the real person behind any all-cash transaction over $300,000. Two years before the Times report, Transparency International found that nearly half of the most valuable residential properties in Greater Vancouver were held by legal structures that hide their beneficial or true owners. No action was taken by authorities in Canada.

At present, Canada is one of the very few Western countries without a registry clearly establishing company ownership. A University of Texas study, Shell Games named Canada as one of the easiest of 60 countries in the world to set up an untraceable company. These so-called shell companies help criminals bilk governments of homeowner grants and other subsidies, along with potential tax revenue. But their primary purpose is helping criminals hide money earned from drug or human trafficking, smuggling, extortion, and fraud.

Ottawa has promised to put in place a reliable beneficial ownership registry by 2023. This would clearly identify the true owner behind corporations formed in Canada. The registry could help rid the country of the global criminal class who have been using Canada to wash illicit moneys, and help authorities recover some of the wealth invested in mansions, high-end art, and other playthings of corrupt actors.

Earlier this year, B.C. announced that it is considering new anti-racketeering laws. This followed the findings of a high-profile expert panel on money laundering, headed by BC’s Chief Justice Austin Cullen. His 1800-page report, issued in June 2022, recommended unexplained wealth order laws and on November 22nd, the B.C. government responded. Legislation would trigger an investigation by authorities, such as B.C.’s Civil Forfeiture Office, any time a financial transaction is deemed “highly suspicious”; the person under investigation would be forced to explain the provenance of the moneys in question. Ottawa could bring in federal measures, bolstering provincial powers and signalling its seriousness. Such measures are already in place in the UK, Ireland, and Australia.

The UK’s anti-racketeering measures, which allow police to file unexplained wealth orders, provide police with a “powerful” investigative tool, according to the country’s National Crime Agency. Ireland’s racketeering law recovered 58-million euros (C$88.74 million) in 2020 alone. The law has had “a significant setback on dismantling and disrupting criminal activities,” according to a 2017 study by Bright Line Law.

New legislation could, for example, help Canadian authorities trace the $114-million brought to Canada by Chinese clerk, Chen Runkai and his family. The Chens — who declared an annual income of $41,000 — invested $32-million in Vancouver real estate. After tracing the money’s murky trail through a long and shadowy network of shell corporations, Canada’s current laws have led to an investigative dead end for authorities trying to determine the source of the family’s wealth.

These are just some of the ideas that panelists urged government to consider. Canada needs a full arsenal of fiscal measures and monetary policies to address the spiraling debt and inflation crisis. It will require Canada to act deliberately, responsibly and with foresight in the face of an uncertain economic future.

Mary-Jane Bennett is a lawyer and former 10-year Board Member with the Canadian Transportation Agency. She lives in Vancouver where she maintains a transportation-related consultancy. She has written on various policy issues for several publications, including most recently, the Association of Transportation Law Professionals.