Thank you. I always appreciate the opportunity to address the finance committee, and particularly today I embrace my role as the token economist. I think economists should always address the finance committee.
You're going to hear a lot about social policy this morning, which is all well and good, but it is worth remembering that during financial crises such as in 2008 or government fiscal crises such as gripped Greece in 2015, social policy was quickly put aside for the larger imperatives of stabilizing the economy and government finances. We cannot take the latter goals for granted, but we must always keep in mind the need to create the conditions where growth and prosperity can flourish.
October's turbulence in global financial markets was a reminder—almost 10 years to the day after the full-scale eruption of the great financial crisis—that the business cycle will never be tamed no matter how much governments manipulate monetary and fiscal policy and regulation. A recent cover story in The Economist asked how bad the next recession will be. This is not scaremongering, just an acknowledgement that the business cycle will always be part of market-based economies. Given the inevitability of recessions, governments should adopt policies that reflect this reality.
The risks in the global economy are escalating with trade wars, high debt levels in China, banking instability in Italy and so on. One cannot predict the incident that will provoke a repricing of risk in financial markets, but the end of the experiment with zero or even negative interest rates will be disruptive. Turbulence in the global economy favours nations that take out some insurance against these risks through high savings, budget surpluses and structural reforms to boost long-term growth.
Canada today is not one of those nations. ln fact we have become one of the most indebted nations in the world, while our productivity has fallen steadily as business investment lags.
lt is short-sighted to be running a fiscal deficit nine years into an expansion. Past experience with the business cycle and the current fragility of global financial markets suggests that the next recession will be sooner rather than later. Therefore, it would be prudent to keep some margin of fiscal stimulus in reserve for when it will make a difference. Most studies find the fiscal multiplier is much higher during recessions than when the economy is growing.
There is no reason for Canada to be smug about its fiscal condition. The overall picture of government indebtedness in Canada is as bad as in the EU or the U.S., and the outlook is deteriorating with the rapid aging of our population.
The auditors general of both New Brunswick and Newfoundland have declared their finances on an unsustainable track, with analysts openly speculating when these provinces will default and go bankrupt. The fiscal problems of Newfoundland and New Brunswick today are a reminder of the severe fiscal challenges facing most provinces. The federal government cannot ignore these incipient fiscal crises, as a provincial bankruptcy inevitably will require federal aid.
The fiscal struggles of these provinces have many causes, but a prime contributor was large energy investments that went wrong. This is a reminder of the fundamental importance of energy to Canada. lt is our largest industry in terms of GDP and our leading export, and by itself it accounts for nearly half of business investment. Without reliable and low-cost energy, people cannot thrive in Canada's immense, cold and dark land mass.
What does Canada have to show for all this debt? lt certainly has not bought higher growth. Since the 2008-09 recession, three times Canada has briefly reached year-over-year growth of 4%, raising hopes that recovery was reaching take-off speed. Instead, each time growth subsided to below 2%. The same thing is working out now, with the Bank of Canada forecasting real growth of 2% for 2018, not much more than population growth of 1.4%.
Slow growth has persisted despite unprecedented monetary and fiscal stimulus, both here and throughout the major industrial nations. At some point policy-makers must admit the ineffectiveness of these policies and the futility of continually applying them.
As long advocated by the Bank for International Settlements, better policy would have focused on increasing the determinants of long-term growth. Many of these policies would not cost the taxpayers a cent, such as expediting the approval of pipelines, reducing interprovincial trade barriers and having less regulation. Canada has done the opposite, as reflected in declining investment and productivity in recent years.
Frustration with slow growth has driven some governments to attempt to legislate higher incomes. They have failed. The most recent example is Ontario's sharp increase in minimum wages, which was intended to raise the wages of low-income earners. Instead, labour income growth slowed in both the first and second quarters. This reflected fewer jobs in Ontario and wage restraint for other workers, as employers wrestled with keeping their overall wage bill under control.
Ontario's experience contrasts with the U.S., which showed how policies that boost business investment and GDP have succeeded in raising labour income. Amazon's recent announcement that it is voluntarily implementing a $15 an hour minimum wage demonstrates how a buoyant labour market is the best and only lasting way to raise wages.
Not all social progress results from government social policy initiatives.
Thank you.