Prime Minister Mark Carney speaks at the Vector artificial intelligence research institute in Toronto on Friday.Sammy Kogan/The Canadian Press
John Rapley is a contributing columnist for The Globe and Mail. He is an author and academic whose books include Why Empires Fall and Twilight of the Money Gods.
Before its release, the federal budget was hailed as a bold, ambitious, “generational investment.” Once revealed, it looked like a central banker’s version of boldness.
Prudent, it was. No, the deficit won’t fall as fast as previously projected and debt as a share of gross domestic product will rise over the next decade, which isn’t ideal. But when it comes to a government’s reputation for money management, the judges’ panel remains the bond market and there the signals have been good. Government bond yields fell during the budget presentation and have held steady since. Over the course of the week, they even slightly outperformed those of Canada’s Group of Seven peers. So, the message from investors, local and foreign, is that Canada remains a creditworthy borrower.
In fact, among the G7 economies, only Germany and Japan can borrow at lower rates of interest than Canada – and Japan doesn’t really count, since its central bank had been repressing interest rates for years to try and revive its economy.
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Britain will table its budget at the end of the month and already there’s growing anxiety that to keep bond investors on side, the Chancellor of the Exchequer will have to either raise taxes or cut spending. Meanwhile, south of the border, bond investors have been waving off Federal Reserve interest-rate cuts, unpersuaded that inflation is coming down as the central bank says.
So, Canada finds itself in a relatively privileged position: Despite announcing a fairly large program of public investment that will require further bond sales, the government hasn’t scared off investors, who seem only too happy to continue bankrolling it. This may be in part due to the fact that Ottawa has separated its operating budget from its capital budget, a sensible measure that mirrors what other Western governments are doing.
However, it does raise a question: If the country’s creditors are only too happy to continue lending at current rates of interest, why didn’t the government go bolder than it did? If there was ever a time for the government to make a pitch for a one-off, massive investment to reorient the economy toward new industries and markets, surely this was it.
It may be that Mark Carney’s prudent instincts overruled anything bigger, or it may be that the government judged too ambitious a program would give the opposition the ammunition it needed to trigger an election. Either way, it remains to be seen if this budget rises to the scale of the challenge that lies ahead.
It’s also perhaps a bit puzzling that the Finance Minister chose to lean heavily on private investors to do the heavy lifting of the government’s building program. Using tax incentives to stimulate investment amounts to spending rather than investment, since the capital produced will be held by private owners, not the government. But more importantly, it’s not clear that such an approach will have the transformational impact the government would like.
Canada doesn’t lack a dynamic startup culture. The problem remains scaling. Many entrepreneurs or businesses end up moving to the United States or selling to investors there because the large Canadian funds often prove conservative in their investment behaviour. The government will at least try to leverage pension-fund investment in venture capital, a positive development if it works – though that too remains to be seen.
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More importantly, in the age-old debate among economists over the conditions under which government spending crowds in or crowds out private investment, recent research suggests that when a government is trying to stimulate the development of new industries, as Canada needs to do, high-risk investment needs to be taken on by the public sector.
Done properly, that then creates demand for startups in the sector, enabling them to grow operations and attract private investors. For example, U.S. private investment in new industries, particularly renewable energy, grew strongly under then-president Joe Biden’s industrial policy. Since Donald Trump returned to office, Washington has ended those programs and switched to private tax cuts, and U.S. capital expenditure has flatlined.
In light of that, Ottawa’s plan to rely on private investment to build a high-speed rail system looks puzzling. Given that such ambitious public works programs inevitably tend to run overtime and overbudget, the government will have to cover losses without any accumulation of capital.
In contrast, the British government spent more than $30-billion building its recently opened train line under London, but the line has already been so successful in attracting ridership that it’s on track to shortly turn a profit for the government. And the line has created a huge amount of demand for British businesses.
In short, this budget isn’t quite a generational investment. As a former finance guy, Mr. Carney will win plaudits for his fiscal prudence. But whether that is sufficient to unleash an investment boom and revive the economy, let alone reorient it toward new industries and markets, is very much an open question.