Finance Minister Defends Fiscal Stimulus and Deficit Spending Amid Pandemic

Finance Minister Defends Fiscal Stimulus and Deficit Spending Amid Pandemic
Deputy Prime Minister and Minister of Finance Chrystia Freeland responds to a question during a news conference in Ottawa on Oct. 9, 2020. (Adrian Wyld/The Canadian Press)
Isaac Teo
Finance minister Chrystia Freeland defended the Liberals’ use of fiscal stimulus and deficit spending in what she called the “wisest macro-economic approach” to sustain Canada’s economy through the “coronavirus recession.”
In her keynote speech at the Toronto Global Forum virtual event on Oct. 28, Freeland outlined the rationale behind the fed’s spending in response to the pandemic.
“Our citizens and our companies are suffering through no fault of their own. For a government to abandon them at a time like this would be monstrous,” Freeland said. “And it wouldn’t be just heartless, it would be a profound economic mistake.” 
The Liberal government has been criticized by the Official Opposition and others for high deficit spending. Though the Liberals haven’t tabled a full budget since March 2019, former Finance Minister Bill Morneau provided a “fiscal snapshot” in July that estimated the deficit would hit $343.2 billion this year. Recent changes to benefit programs are likely to increase that number significantly. 
 In September, Parliamentary Budget Officer Yves Giroux cautioned about the sustainability of the deficit.
“It’s without a doubt that we cannot afford deficits of over $300 billion for more than just a few years. And when I say a few years, I really mean a year or two. Beyond that, it would become unsustainable,” he told Global News on Sept. 6.
“So if the government has plans for additional spending, it will clearly have to make difficult choices and either raise taxes or reduce other areas of spending. Because it’s clear that we cannot afford to have deficits of that magnitude for even the medium term.”
Freeland countered in her speech that even after unprecedented pandemic spending over the past months, Canada still has a low debt-servicing ratio of 0.9 percent as a percentage of GDP compared to 6 percent in 1995. 
“We remember the fiscal shock of the 1990s when Canada flirted with insolvency,” Freeland said. “Both the terror and the triumph were formative for a generation of Canadians. But it’s a poor general who fights the last war. And the reality is that today, the prevailing global economic environment is changed entirely. In fact, not one of the factors that drove the fiscal crisis of the 1990s holds true today.”
She argued that interest rates are at a historical low, adding that their expansive approach will be “limited and temporary.” 
She added that “none of us has a crystal ball,” therefore, the federal government will continue their emergency spendings to support Canadians and businesses until the curve is flattened and the virus is under control. 
“Doing too little is more dangerous and potentially more costly than doing too much,” she said.
In September, the Fraser Institute think tank cautioned against rising debts in a report on Canada’s emergency spending amid the pandemic. 
“The long-term combination of persistent deficits, debt and potential rising interest rates means we risk repeating the near debt and currency crisis of the mid-1990s when federal debt-servicing costs consumed more than one-third [35.2 percent] of federal government revenues,” the authors wrote.

In a recent report, the parliamentary budget office estimated that the size of the debt compared to the size of the domestic economy could be around 48 percent this year and next.