New seriousness is required in the Fall Economic Statement

Letter to the Honourable Chrystia Freeland, P.C.,M.P., Deputy Prime Minister and Minister of Finance regarding the upcoming release of the Fall Economic Statement.

Dear Deputy Prime Minister, 

In a few weeks, you will release your government’s Fall Economic Statement. It will provide Canadians with a snapshot of the economic and fiscal outlook at a moment of significant geopolitical uncertainty abroad and a deterioration of economic conditions here at home. 

The attacks by Hamas in Israel almost two weeks ago and the resulting violence have shaken us all in a profound way. Tragically, the Middle East is only the most recent region to be consumed by armed conflict and the deaths of innocent civilians. In Europe, the brave people of Ukraine have been fighting against unjustified Russian attacks for close to two years.  

In the Indo-Pacific, Canada finds itself engulfed by geopolitical tensions involving the world’s two most populous countries, China and India, stemming from allegations of the most serious types of foreign interference. Around the world, state and non-state actors are targeting Canada’s economy via increasingly sophisticated cyberattacks on individuals, our companies and our critical infrastructure. 

The state of the world today reminds us of the inherent fragility of our international order and the global economy. For a country such as Canada, which has been a trading nation even before Confederation and a champion of multiculturalism and multilateralism, geopolitical shocks such as these have a deep impact. The global environment is only further compounding the challenges we were already experiencing domestically.  

When I wrote to the Prime Minister in late August, days before the Cabinet retreat, I argued our domestic economy was starting to feel the weight of high interest rates, low productivity, and persistent inflation.  Since then, inflation has remained stubbornly high, productivity has gone down over several quarters and interest rates are still rising after months of significant monetary policy tightening by the Bank of Canada.  

The yield on the 10-year Government of Canada bond is now hovering around 4 per cent, from 2.8 per cent just six months ago. This is a clear sign that bond markets are not expecting any interest rate cuts by the central bank anytime soon.  It also means that debt servicing costs will continue to be much more prohibitive than previously forecasted in Budget 2023. Furthermore, it appears the program review you committed to is actually a minor reallocation exercise with no real savings to the fiscal framework.  

While we may have avoided a recession so far, there is considerable risk that could change in the next few quarters. At best, private sector economists’ forecasts point to no growth in 2024 and very weak growth thereafter. This suggests higher interest rates for longer to contain stubborn inflation. Whether or not there is a technical recession will be of little comfort to Canadians – who are already experiencing a higher cost of living. Alarmingly, a recent poll found that 65 per cent of people surveyed believe the next generation will have a lower standard of living.  

In addition to these significant developments, your government is also contemplating new structural spending on housing and a new national pharmacare program. As valuable and important as the contemplated measures may be, funding them with borrowed money is ill-advised and will only exacerbate the precarity of our public finances. 

With long-term interest rates at the highest they have been in years, it is irresponsible to suggest that economic growth will be higher than interest rates for years to come. Governments can no longer run permanent large deficits without fear. The era of low interest is no longer with us, and that is a reality the government must address. 

This is why we continue to urge you to adopt a new and credible fiscal anchor, one which would limit debt servicing costs to a maximum of 10 per cent of revenue going forward. By doing this, you will preserve the government’s capacity to fund programs Canadians rely on and not put an excessive and unfair fiscal burden on future generations.  

More deficit-financed spending at higher interest rates will eventually and inevitably lead to levels of indebtedness that will force future governments to cut spending and raise taxes. It will lead to a weakened economy with considerable uncertainty for businesses looking to invest, hire and grow in Canada. It will also put in jeopardy the social programs Canadians value. This is precisely what we must avoid. 

Similarly, we urge the government to move ahead with growth-enhancing measures announced in Budget 2023, such as your commitment to outlining a concrete plan on permitting reform by the end of this year and accelerating the implementation of measures and incentives towards the energy transition.  

In the aftermath of last week’s Supreme Court ruling on the Impact Assessment Act, it is essential that your government move quickly to provide clarity, certainty, and predictability on the rules for major projects. We must not lose out on once-in-a generation business investments that are necessary to reduce our emissions and foster economic growth for the benefit of all Canadians. 

We live in uncertain times. A new seriousness is required to tackle the challenges in front of us. Please be assured that Canadian business leaders will do their part and support your efforts to meet the moment. 

Sincerely, 

Goldy Hyder