Freeland makes a 'modern supply-side' bet on Canada's future economic growth
Thanks to Janet Yellen, the federal Liberals now have a fiscal philosophy to call their own
Presenting her second budget to the House of Commons on Thursday, Finance Minister Chrystia Freeland said that "now is the time for us to focus — with smart investments and a clarity of purpose — on growing our economy and on making life more affordable for Canadians."
Nearly everyone in Ottawa would agree with those broad goals. As ever, the real debate is about how to do it.
As Freeland spoke, interim Conservative leader Candice Bergen was at a microphone in the House foyer telling reporters that her MPs would not support the "out-of-control spending" of an "irresponsible ... typical NDP spend-and-tax budget."
Not to be outdone, Pierre Poilievre, the presumptive front-runner in the Conservative leadership race, tweeted that the "socialist coalition budget" would "turbocharge" inflation.
The NDP effect shouldn't be overstated. For all the hype, the NDP's contributions to this budget are relatively modest, at least in the fiscal sense.
The NDP's biggest demand — for the expansion of subsidized dental care — adds $5.3 billion to the budget over the next five years. A one-time increase to the Canada Housing Benefit — a proposal that came out of the negotiations between the Liberals and New Democrats on the supply-and-confidence agreement that would stave off an election until 2025 — will cost $475 million this year.
Other than those elements — which will matter a lot to the Canadians who benefit from them — this is a budget that a Liberal majority government would have tabled, with a couple of orange post-it notes affixed. The deficit is projected to decline steadily to $8.4 billion in 2027, which would be the smallest deficit these Liberals have run.
But there is still a debate to be had about how Ottawa should help build a growing economy — especially now that the federal government has embraced – or at least borrowed – a new name for its own approach.
"Our strategy is what Janet Yellen, the U.S. secretary of the Treasury, has recently dubbed 'Modern Supply-Side Economics,'" Freeland said Thursday.
Freeland argued in the budget that what Yellen described in a speech in January is more or less what the Liberals have been trying to do for the last six-and-a-half years. But Yellen may have explained it in a more straightforward and succinct manner than any Liberal has managed to date.
As Yellen framed it, "traditional" supply-side economics — the name given to the policy agendas of conservative figures like former American president Ronald Reagan and former British prime minister Margaret Thatcher — "seeks to expand the economy's potential output … through aggressive deregulation paired with tax cuts designed to promote private capital investment."
"Modern supply-side economics, in contrast," she continued, "prioritizes labour supply, human capital, public infrastructure, [research and development] and investments in a sustainable environment," the treasury secretary said. "Modern supply-side economics seeks to spur economic growth by both boosting labour supply and raising productivity, while reducing inequality and environmental damage."
A different approach to growth
Two and a half months later, Freeland has tabled a budget that puts significant sums of new money toward housing, infrastructure, innovation and clean growth, while touching on things like immigration and training.
"Modern supply-side economics borrows the supply-sider's key insight — that increasing supply is fundamental to growth — but takes a progressive, people-centred approach," Freeland said Thursday.
The refrain from business-minded critics has been that the Trudeau government has lacked a focus on economic growth. Those critics probably won't be mollified by the fact that "grow the economy" is right there in the title of this year's budget — just as they weren't convinced when "growth" was in the title of last year's budget.
But the real dispute seems to be over how this government has chosen to promote growth — with those critics wishing the government was more interested in cutting taxes, reducing regulation and balancing the budget.
Reversing a two-decade trend in budgeting
Freeland made a point in her remarks of stating a commitment to fiscal discipline. She cited the "fiscal anchor" of a declining debt-to-GDP ratio. The budget promises two separate reviews to find $3.8 billion in cuts to planned annual spending. And there are tax credits for investment in critical minerals and carbon capture and storage.
But this is also a budget that promises to establish a Canada Growth Fund to support low-carbon industries and a Canadian Innovation and Investment Agency to help commercialize research.
In that sense, invoking "modern supply-side economics" might be read as an attempt — by a Liberal government that has never gotten along particularly well with Bay Street — to expand the conversation about what counts as a focus on economic growth.
The Liberals have reversed a two-decade trend of declining federal revenues and spending. Federal program spending was 12.5 per cent of GDP in the last full year of Stephen Harper's Conservative government and Freeland projects that it will be 14.7 per cent in 2026-2027. Federal revenues were 14.0 per cent of GDP in 2014-2015 and they're now projected to reach 15.7 per cent.
Those are not insignificant changes. If it once seemed risky to propose new taxes or spending, those shifts might seem somewhat remarkable.
Risks ahead
But they also need to be put in perspective. That rate of revenue would still be lower than it was in 2004-2005 (16.0 per cent), the last full year of Paul Martin's Liberal government. Spending would still be below what it was in 1994-1995 (15.6 per cent), before Jean Chrétien and Martin carried out a series of deep cuts to balance the budget.
Still, there remains no small amount of risk to Freeland's modern supply-side economics. For one thing, federal spending still needs to be spent well — and the more of it you spend, the more vulnerable you are to accusations of misspending. For another, the economy needs to keep growing.
WATCH: Conservative interim leader Candice Bergen rips into federal budget
The finance minister also hasn't budgeted yet for all the spending the federal government might need or want to do. A possible increase to the Canada Health Transfer and perhaps a future funding boost to bring military spending closer to NATO's two per cent of GDP target have not been added to the books.
Freeland suggested Thursday that the government's actions ultimately will help to combat inflation, but she offered no quick fixes. In fairness, there may not be any quick fixes. And the idea that federal spending is driving inflation might be overly simplistic.
But the longer that high inflation and soaring real estate prices linger, the grumpier voters might get. It was inflation that helped usher in the supply-side economics of Reagan and Thatcher, after all. And waiting in the wings is Poilievre, who is full of contempt for the federal government's spending habits and is calling for tax cuts and the removal of government "gatekeepers" so that Canadians can prosper.
Modern supply-side economics isn't socialism. But its merits — and the Liberal government follow-through — still must be tested.
ABOUT THE AUTHOR
