‘Secret’ memo outlines tools the finance department and Bank of Canada could use in a recession

0
32

An internal memo addressed to federal Finance Minister Bill Morneau in August outlined a range of fiscal and monetary policies the Liberals and the Bank of Canada could employ in the event of “economic shocks” — a range that includes lowering interest rates even further and relying on Employment Insurance.

The August memo, marked “secret,” was released to CBC last month through the federal Access to Information Act. It’s leading some economists to call on the government to prioritize some tools over others, and to consider at least one unprecedented economic strategy.

The unredacted portions of the memo don’t cite any specific recession warning signs — but the document does note that, since the 1970s, Canada has experienced four significant recessions, one per decade. Canada’s last recession happened in 2008-09, triggered by the U.S. housing bubble.

“Of note, Canada has never experienced a significant recession that was not also suffered by the United States,” the briefing note says.

“On average, since the 1970s, recessions in Canada resulted in the equivalent of 550,000 job losses and a 4 per cent decline in real GDP.”

Now, the fallout from the United Kingdom’s protracted political brawl over leaving the European Union, trade disputes between the U.S and other countries and the ongoing protests in Hong Kong have some business analysts predicting economic turmoil.

The latest GDP figures show Canada’s economic growth in the third quarter slowed due to a drop in exports. Statistics Canada reported last week that Canada’s real gross domestic product grew at an annualized rate of 1.3 per cent in the last three months, compared with 3.7 per cent in the previous quarter.

The briefing note gives Morneau an overview of the tools he and Bank of Canada Gov. Stephen Poloz could use in the event of an economic downturn. They include reducing interest rates below zero — so-called “negative” interest rates — increasing government spending, offering more grants to businesses and households and increasing the money supply through quantitative and credit easing.

The memo outlines the “proposed sequencing of policy tools should Canada experience a recession.” The details are blanked out in the document obtained by CBC News because, since they contain advice by or for a government institution or cabinet minister, they are exempted from access laws.

Stimulus disappointed last time

Economists who spoke with CBC News said the Department of Finance and the Bank of Canada can’t expect the playbook they used the 2008-09 recession to work next time.

Conference Board of Canada Chief Economist Pedro Antunes said strategies such as lowering interest rates (already at record lows) and quantitative easing weren’t as effective as expected during the last downturn — and won’t help pull Canada out of the next economic downturn, either.

‘Quantitative easing’ involves central banks buying assets such as government and corporate bonds from commercial banks and financial institutions, increasing the supply of money in the system. The goal is to lower interest rates and leave financial institutions flush with cash, which (in theory) should allow them to lend more to stimulate economic activity.

“We really didn’t see that having a big impact globally or in Canada, in terms of driving investment,” Antunes said. “It was more of a consumer-led kind of recovery.”

Antunes and other economists said stimulus backfired in the last recession: instead of expanding their businesses and hiring more people, businesses seemed to hoard the injection of new money created through the monetary policy of central banks.

Although the briefing note touches on this point, Antunes said he would have liked to see infrastructure investment — which spurs private sector spending and job creation — play a more prominent role in the government’s recession toolkit.

Prime Minister Justin Trudeau makes an announcement on the Trans Mountain Expansion Project with Minister of Finance Bill Morneau in Ottawa June 18, 2019. (Sean Kilpatrick/Canadian Press)

The Fraser Institute, however, argues that since it takes years for infrastructure projects to get built, they’re not that useful in fighting recessions. The centre-right think tank points out that, before workers are hired and the first shovel hits the ground, such projects have to go through feasibility studies, design changes, legislative funding allocations and consultations with Indigenous communities, provinces, territories and municipalities before they even make it to tender.

“I think the evidence is overwhelmingly clear that it’s almost impossible to do that in a short period of time,” said Jason Clemens, the Fraser Institute’s executive vice president. “And so, by the time those projects get shovels in the ground, the recession is over.”

The Liberal government isn’t helping matters by racking up back-to-back deficits, which could tie its hands when the next recession hits, Clemens said.

The sections of the briefing note that are not blacked out say nothing about how the Liberals would manage deficits and debt during a recession.

Clemens said the government should rely on automatic stabilizers like Employment Insurance — which ramps up spending when the number of jobless Canadians increases — to keep the economy on an even keel.

‘Helicopter money’

But David Macdonald, an economist with the Canadian Centre for Policy Alternatives, said EI doesn’t always help the people who need it most because some Canadians — the self-employed and workers who don’t receive enough hours — don’t qualify for benefits.

That’s why he and at least one European economic think tank are calling for an “unprecedented” response to the next recession: central banks, working with finance ministers, giving money directly to businesses or citizens. Governments typically deliver such benefits to citizens, not the Bank of Canada.

“Everyone gets $100 or $200 a month, or lower-income families get more and upper-income families get less,” Macdonald said.

Economists acknowledge this “helicopter money” concept is an extreme form of economic stimulus. Still, it’s been suggested by former U.S. Federal Reserve chair Ben Bernanke as a strategy to fight deflation.

“This is something that’s starting to be discussed but hasn’t been implemented,” Macdonald said. “But I think these are the types of things that the Bank of Canada is certainly thinking about going into the next recession.”

Where’s the plan for Alberta and Saskatchewan?

Economist and columnist Erica Ifill notes the toolkit doesn’t seem to have anything to say about the sorts of targeted regional strategies the government or the Bank of Canada could undertake to stimulate regional economies.

“I don’t see in the briefing note the economic position of the West and any analysis around that,” Ifill said. “I’m really concerned with the West suffering, as they are right now, that the federal government is not looking at them as a specific case.”

The Bank of Canada headquarters in Ottawa. (Sean Kilpatrick/Canadian Press)

Ifill is calling on both the federal government and the Bank of Canada to consider economic stimulus packages tailored for Canada’s regions.

A Department of Finance spokesperson downplayed the significance of the memo, saying that economic growth in Canada remains stable and unemployment is low.

“This note provides an update on the department’s work on the general mechanics of the federal government toolkit to respond to potential slowdowns in the economy,” said ministerial spokesperson Pierre-Olivier Herbert.