Ottawa Underestimating Recession Likelihood, Planned Spending on Policy Goals: Former BoC Governor

A woman walks past the Bank of Canada headquarters in Ottawa on June 1, 2022. (THE CANADIAN PRESS/Adrian Wyld)

The federal government is underestimating the amount of money it will have to spend to achieve its Budget 2022 policy objectives, along with the likelihood of a recession occurring in 2023, says former Bank of Canada (BoC) Governor David Dodge.

“The extent of additional spending (or tax credits) required to implement the government’s promises as set out in Budget 2022 and FES [Fall Economic Statement] 2022, while plausible, is still likely to underestimate the spending and borrowing that will actually be required to implement the government’s policy objectives,” reads a report co-authored by Dodge and released on Jan. 23 by Bennett Jones and the Business Council of Canada (BCC).

It adds that there’s “a high likelihood of a more severe recession in 2023” and also that “medium-run inflation pressures are highly likely to continue and interest rates to remain well above pre-COVID levels.”

Dodge served as the BoC governor from 2001 to 2008 after previously being the Deputy Minister of Finance from 1992 to 1997, during which time he was also a member of the bank’s Board of Directors.

The BCC’s report says there is “a high risk” the federal government will not be able to deliver on its promises laid out in Budget 2022 and its fall economic statement and adds that Ottawa may need to use “some $60 billion of additional program spending” to deliver on its policy objectives.

It also says the government has assumed set of “plausible but optimistic” economic conditions from now until 2027, when in reality there is a chance conditions will be much worse.

The report further points out some potentially large federal spending measures this year, including the possibility of Ottawa increasing health-care transfers to the provinces and taking steps toward transitioning to a low-carbon economy.

Scenarios

The report gives a number of possible scenarios that could unfold this year depending on economic factors and actual federal spending.

One is the possibility of “a full-blown recession in 2023,” which the authors say assumes a combination of heavier and more persistent supply constraints along with “more sticky inflation” and higher interest rates.

Other scenarios include increased federal spending “relative to the base scenario from 2024 onwards,” lower economic supply, which would bring about higher inflation, or a combination of scenarios.

However, the report also says that if any of these scenarios unfold, they will likely happen simultaneously with at least one other.

“Our conclusion is that the fiscal plan as laid out in Budget 2022 and the fall FES is unlikely to be sustainable over the decade ahead,” the authors write.

Current BoC Governor Tiff Macklem previously said he believes a “severe recession” in 2023 is unlikely, but acknowledged that Canada “could certainly get a couple of quarters of negative growth.”

The central bank is expected to announce its eighth consecutive interest rate hike on Jan. 25, according to a report by The Canadian Press, which would bring its key interest rate to 4.5 percent.