The Politics of Money: An IFSD Podcast

IFSD (00:06)
Welcome to the Politics of Money, the official podcast of the IFST at the University of Ottawa. Joined here by President and CEO Kevin Page and our chief economist Dr. Mustafa Eskari. We'd like to thank our tens and tens of viewers and thank my mom for liking and subscribing. So on Tuesday, the economic and fiscal update, Kevin, you've done a few of these. Yeah. So I think Mustafa and I go back to the early 1980s.

a department of finance, so we've definitely done a few of these. ⁓ Though it's different this year though, and we need to talk a bit about that, talk a little about what we should expect. I mean, one thing that's different is like, we're actually, it's gonna happen in the springtime. We're gonna get a mid-year economic and fiscal update in the spring. So ⁓ any thoughts just about like the change of the financial cycle and the fact that it's happening now and the context in which it's happening?

I mean, I think moving the Budget to the fall was a great move. I think the opportunity to get a lot more into main estimates for parliamentary consideration, we just split it up so that you basically have main estimates and then a Budget and then supplementary estimates gets a bunch of the Budget measures and the balance of them trickle out in the balance of the year. So from a transparency point of view from including parliament in the role of overseeing government, of holding it to account.

It's a lot better I think at this sequencing. I think we just got to get used to it, right? There's a lot of muscle memory kind of getting ready for the fall. Departments I'm sure were used to kind of preparing their submissions during the fall for getting really hit that first Christmas deadline as you, Kevin, you and Steve and I remember. A lot of that was locked down by Christmas. So this means people are working over the summer. It's a good thing. And Mustafa, just to build on that, for the viewers, for the listeners,

How would you describe the difference between a Budget and an update? A major update? Well, I think there should be a major difference between the two of them. It should be an update. It used to be just an update. Right over the years, we have seen that the governments actually have used this as sort of a mini Budget in some cases, introducing new measures.

Sometimes it's needed, depending on the situation. I think in the current situation, given that we are going through a major crisis, both internally and globally, I think it would be probably necessary for governments to sometimes make adjustment to their measures that they had in the Budget, or even provide new measures that would require, that the system would require those. Because things are changing so quickly that.

the government needs to react to those. so back to Sahir. So Sahir, Budget 2025, we got it in the fall, big Budget, lots of measures, 100 plus measures, significant fiscal outlays, almost 2025, 26, 26, 27 is like $30 billion a year more, which is like almost a full percentage point of our gross domestic product.

definitely framed around more capital investment for trade diversification, for productivity enhancement, the buildup of the military, some reallocations. Since then, we've seen the government talk about we need to do more in affordability. There's been announcements with respect to how we're going to use the GST tax credit, but also very recent announcements on excise taxes for fuel and diesel. Is it going to be hard for the government to balance?

Pushing forward on this medium term agenda, but we have to still deal with these shorter term issues. What do you think we might see? Yeah, I think this has actually been really interesting. Like the big change was composition of spend, right? From operating in transfer dollars to capital, even transfer dollars that lead to capital. So one really big change. Second big change was a lot of reallocation, spending money from lower priority to higher priorities. I think the one we talked about

Kevin in the fall was the hinge moment. The fact that we had very real geopolitical risks, threats to Canada's sovereignty, threats to our long-term economic health. There had to be a response. But the issues of affordability were – they weren't on the back burner. They were just like just behind. They never went away. In fact, it's kind of – the war in the Middle East in some ways would get to kind of a supply shock on oil, brought the affordability back to the front burner, right? So housing looks like supplies getting a little better, maybe a little bit of

heat off of it but we still have food insecurity. We still have affordability issues and this is to me just proof that we're never that far away from such a hot button political issue. And it reminds us of these updates, these budgets, in some ways are first and foremost a political document. So if they don't respond to the anxiety of Canadians as they are, I don't think they hit the mark because they could put out a technical document for us to analyze and markets to read. They don't. These are statements about intention, statements about assessments of the environment.

I have to think that even the early measures they did on kind of relief on gas prices is a recognition that the affordability issues are never that far away. Okay, so we'll come back to some of these policy expectations potential for further announcements,

Mustafa you've been you know you ran forecasting economic forecasting at Department of Finance for years when I was there. When we were at the property Budget office together with saw here you took charge of

providing these economic and fiscal outlooks. I remember going in the fall of 2008, where the country was going into this significant period of uncertainty.

Certainly a sense that we're headed for a recession. First of all, what do you think the probability of a global recession is, which I gather international people say is less than 2 % growth.

What should we see in terms of the government's presentation of the planning outlook? Well, definitely, we are going through a global economic weakness and crisis right now. Certainly, it's coming mostly because of the way that the US government has decided to operate deal with its trade issues, and also the other issues like the war in the Middle East.

And these shocks, these shocks to the system, both of them, both from the war in the Middle East and from the trade issues, these are essentially supply shocks.

So the challenge for governments right now is that dealing with the supply shocks is extremely difficult. The typical stabilization measures that the government use do not work in this case, because you want, at the same time you want to strengthen the government, at the same time you're dealing with high inflation. And those two do not correspond to each other.

So there is a challenge there. The Bank of Canada has to decide if they want to raise interest rates to deal with inflation, that's going to affect the level of activity in the economy. And that's not what we want in the current situation. On the other hand, if the government starts increasing its spending or reduces taxes, that's not going to deal with the source of the supply shock. It may provide some relief for people. But at the same time, it's going to actually

to inflation issues. So there is that sort of a challenge for the government. So it would be interesting to see how the government is going to deal with those things. I mean, one obvious measure that the governments can provide in those cases is what Sahir was talking about, provide sort of targeted measures for people that are going to be affected significantly by these things.

We have seen some of that done by the government on the GST stuff, the last one on the excise tax. Again, it provides some relief, but it's not really targeted. So some of that money is going to go to relief is going to go to people that really don't need it. But it is something that the government needed to do, I guess. At this point, they don't really have a lot of different levers that they can use for this kind of thing.

The affordability is there. It's not something that the government can control. The government cannot control prices. They can provide measures and help some people, but we are going to be dealing with those affordability for a while.

So Sahir like just building on with Mustafa said, and going back to the policy discussion where you were previously,

Is it like, we've heard we had speeches from the prime minister, famous speeches a famous speech in Davos. There was the convention speech. Even just last weekend, there was a video about forward guidance. And there were some common themes across those speeches around this moment, this hinge moment, the rupture. But I think like Mustafa says, something we didn't have in the fall is the Middle East oil price shock, a supply shock.

Is that going to be hard in an update? Should we expect to hear more of the same from the prime minister with respect to know we've got to keep focused on the long term? How does, in an update in the speech from the finance minister or the prime minister, how do they balance that off, that communications? It's interesting. I've had some calls already from media just kind of a preview for the update and our discussion is like, isn't oil stock good for us?

And it's one of those really kind of nuanced issues where for oil producing parts of the country, yeah, there's a windfall. It's not going to last long enough to maybe drive long-term investment. So it's good. And the federal government benefits fiscally a great deal from this. So there's this positive benefit. But I think as Mustafa is outlining, the other hand, our customers in Europe are poorer, right? We are spending more of our household budgets, which are already under threat.

or under pressure from food and housing and we're spending more. So consumer spending then starts to get hit. So this is one of those topics which actually I think is really hard to explain in a Budget document or a fiscal update document because there are pluses and minuses and I think for the prime minister, he has to end up speaking to a lot of different constituencies and some of whom are benefiting and others who are not. And that's why these things are political documents. I think we can put a scorecard up there.

And it will only have so much resonance. This is for really good political communicators to kind of sort that out. Can we keep our eye on the prize, which is I think do we have a resilient, viable long-term economy? That, again, to Mustafa's point, we still have to keep an eye on that because there are limited things we can do in the short run. We've learned that this is not the first time we have faced stagflation.

So it is difficult to get any useful policy instruments to deal with this thing. So one tactic has been to keep our eye on the long-term prize and that might, I would imagine, be an important part of this update.

I saw a little bit of that in Mr. Carney's speech, He was trying to tell people that things are not going to be rosy and there's going to be a lot of challenges. And I think we don't see much of that from the politicians normally. They try to always sugarcoat everything. And that's not the case right now. On the positive side, actually, the Canadian economy

actually has shown some resilience that we haven't seen in other developed countries during that global shock that we are seeing. We are still having second highest growth based on the IMF for 2026 and 2027. And it seems like we have done some adjustment to the trade shocks internally.

Although exports are lower than what we used to see or we were expecting to see, but they're better than what we expected once this sort of trade issues started with the US. So the economy seems to have shown some resilience. And that is sort of a good news ⁓ within this current situation that everybody is worried about and all the uncertainties.

Again, I mentioned uncertainty. And this is really the major issue right now. And I think we can talk about this a little bit more. But that's the major, major issue.

Well, let's do that. Let's talk about it a bit more. So maybe a question for both. Because the issue is coming up about whether the government is fiscally responsible. I'm not going to define that. But in the context of an economy where growth is

showing some resilience, but it's still very weak growth. If we look at like year over year growth at the end of the year, it's less than one percentage point, almost no growth in the goods sectors. You know, the growth is coming from the service sector. But it's still the economy is still growing. The unemployment rate is sitting in that six and a half to seven percent range. We're running deficits, you know, in, you know, probably the 70 billion dollar range, let's say plus or minus, which is like two to two and a half percentage points of GDP.

Is running a deficit, the fact that we have a deficit right now, is it surprising from a cyclical perspective, given that the economy is so weak, like measures of our output gap where the economy has vis-a-vis potential is probably a full percentage point to percentage point and a half less than potential? So shouldn't we expect to be having some deficit right now? And if we didn't have a deficit, would the economy not be that much weaker?

Oh, absolutely. I think we should expect some deficit. mean, you can always argue about the size of the deficit, whether it was all needed or not. I mean, we have gone through the 10 to 11 years of essentially focusing on the social side of things and providing social safety nets in Canada. And those things cost. Those things cost money. And the result of it, we have seen that the government deficit.

And then we went through the COVID. Again, that was another impact. But overall, at least when we compare it with other countries and when we look at the measures of fiscal sustainability, we don't seem to be in a crisis on that one. I think that doesn't mean that the government has to continue increasing its funding. It means that they have to be careful with what they are doing. But there are certain things. And as Sahir mentioned, there have been a lot

reallocation and those things have to continue again, reallocating from the things that are not 100 % necessary at the moment to things that are absolutely necessary right now. Okay, Sahir, what are the chances that the Leader of the Official Opposition says these deficits are just too high? And how does the government convince Parliament and convince Canadians that

from a point of view of where the economy is at, from the point of view of international comparisons, from the point of view of bond rating agencies frameworks actually, it's moderate. Like, where do you see this deficit debate going? Is it an important debate? I think it's less important than we think. I think what we're talking about is a constrained fiscal environment, where we're saying this government should continue to focus on the composition of its spending, you know, more towards capital,

less towards transfers and social programs. But also that for anything new, it should be looking for reallocation. So I think there is an important message here about fiscal discipline. I think when we start to think about how much is too much, one, we can look at the credit agencies, the bond rating agencies.

So, Sahir, when bond rating agencies look at Canada, what are the key things that they're looking at? Well, how did we get to be AAA? What makes us so good? Well, I think there are at least three factors that, you know, we do spend time with the bond rating agencies and we get to learn from how they think about Canada and then we provide our input. You know, it kind of comes down to three things.

Do we have a relatively healthy, resilient economy that makes us, you know, fiscally sustainable over the long run? And that implies a whole bunch of, you know, an efficient tax system at the same time. Do we have solvent public pension funds, right? And you know, a lot of countries where, you know, they're funding public pensions out of their treasuries, right? As you get an aging population, it's a lot of pressure on current spending that we don't have to do because we have these healthy pensions. So that really matters.

And the last factor which maybe didn't factor into thinking a few years ago, all of a sudden matters which is healthy institutions. So do you have good democratic institutions? Do you have good oversight? Auditor General, Parliamentary Budget Office, do you have healthy governance on sectors like banking, critical to the economy, transportation, communication? So you want to have all those ingredients.

Which are maybe broader than just what people think about in terms of, you know, do we, is the deficit number look big or small? the bond ratings for a country actually look much more deeply into those other factors because those are the things that actually kind of trip you up when you're fixated on this one number. And it's a really interesting bad habit for all of us maybe. You come out of a Budget or fiscal update, you're in the media lockup and there's this fixation on "what's that number?"

And our bond ratings are judged on much more kind of longer term things. Are we sustainable, know, which in, you know, Mustafa's many years on basis of a healthy economy, long term growth, demographics, and a spending track that's actually tracking lower than our economic growth. These are the things that really factor into it. And it's not just about that deficit number in that moment.

So Canada does relatively well and bond rating agencies won't tell you that but it is a relative score and other than Germany, we're the only AAA credit rating country out there. If we want to look more like the Americans, they're running a deficit of up to what, 7 % spending relative to GDP and where, what, two and a half? So if you wanted to juice our economy that much more, we could probably have the type of growth 3 % more plus.

⁓ But we have essentially a built-in constraint. We're not a reserve currency. We're a small open economy. We don't have the leverage of every other country wanting to put capital and sell things into our market. So we're living within these set of constraints. And I think that's what the Prime Minister and Finance Minister have to communicate to Parliamentarians that there are real risks as Mostafa articulated, we have to deal with to be a sovereign country, to be healthy economically over the long run and to survive the short run.

And that means doing a bunch of things well. And part of that is saying maybe we don't get overly excited and fixated on a particular deficit number, but we have really good planning assumptions. We start to build up some of our buffers and we start to get that muscle memory back on how to do reallocations and cut spending from areas that are lower priority, lower performing areas into those that are kind of the priorities of the day. And I think that's how a government navigates

these kind of difficult waters while maintaining fiscal credibility and without fixating on what that deficit number needs to be, but ensuring that we remain fiscally sustainable. I that's a non-negotiable.

So Mustafa, you're a macroeconomist.

And you used to work at the IMF. We just got reports from the International Monetary Fund, the IMF, on the world economic outlook and a new update on the fiscal monitor. ⁓ And as you've already alluded to, Canada's showing the numbers are maybe even a little bit better than we had in terms of real GDP growth, in terms of what we had in last November. But when you look in that fiscal planning framework for the next five years, the deficit

as a percentage of GDP going in that 2 to 2.5 range to a little bit low 2%. Over that period of five-year period of time, we're going to get rid of the operating deficit. It's going to get into balance by '28, '29. It's going to be just a capital deficit of about a percent, percent and a of GDP. In the context of all these downside risks that are out there that are highlighted in the International Monetary Fund,

Is that attainable right now? Do we have the guardrails? Should the government stay focused on that target, given this macroeconomic framework? What are your thoughts? What should we expect to hear in the update? I think they should show an operating Budget that is going to be balanced or a little bit in the surplus by 2018. I think they need to stay with that. Otherwise, they're going to lose a lot of credibility, given that people are having doubts about the way that they have,

sort of defined capital relative to operating. there are sort of debates about that. But aside from that, I think they should at least show that they maintain that target.

And that would give them a little bit of a room on the fiscal side.

I don't know, their nominal GDP was about $77 billion lower in 2025 than what they expected at the time of the Budget. But that will give them about $10 to $12 billion of room there. And that would help. And plus, some of the sort of the lapses that they're going to see in their Budget is going to help them to show

some kind of fiscal situation that is maybe a little bit slightly better than what they had at the time of the Budget over the next five years. And that will help on the debt to GDP ratio. Maybe like that. we'll see next week what they're going to show. But this is what I think is going to happen. OK, so Sahir, you've spent a fair bit of time in the few months really speaking to

public servants speaking to Deputy Ministers, new Deputy Ministers. This issue of this operational challenge, we have a very new agenda, lots of capital formation in this Budget, a kind of real shift for the government. know, the Prime Minister saying we're gonna do big things, we're gonna take big risks and we have to deliver. And this sense that there's, it's not gonna be an easy agenda to deliver. A big part of this Budget, or this update rather, has to be that a focus on

know, execution operations, like where – what can the government do to kind of make us feel better that, you know, they can deliver on this agenda?

Yeah, I think that one of the things I'll be looking for I think the execution risk might actually swamp the fiscal risk kind of going forward. I think that's one thing that we have to watch for any observers, Parliamentarians, Canadians and even the prime minister because I think this is where his aspirations as a political leader are going to meet the realities.

of delivery. I think in a different way, Prime Minister Trudeau struggled with that. He had a really large agenda on kind of big social policy changes. And if delivery involved writing a check and transfers, that was doable. Anything more complicated, we saw difficulties, right? So I think what we're hearing internally is that these aspirations are meeting with risk aversion, some cultural reticence to implement.

Maybe a misunderstanding sometimes of where there's a commercial interest versus a public good on various projects. And so, you know, an inertia of how things have been done in the past. That's not great when you have an ambitious agenda and an urgent one in a context that has to be ⁓ met with urgent action. The systems aren't built for that. And, you know, we had a bit of a reaction under COVID but really a lot of that involved writing checks and the system can do that.

When you have to do deals, transactions, when you have to build things, the economy will not respond to a public announcement. It doesn't respond to a fiscal allocation. It responds to shovels in the ground. So I want to see some kind of a dashboard. Like where are we? Where are the impediments? Where are the constraints of getting things done? Because I think the prime minister has to know, I think the public have to know that this is a national project. But we also have to know, you know, are there challenges, are there delays?

Where are they? Are they in Fed-Prov relations? Are they in Indigenous consultation? Or are they trapped within the bureaucracy itself? And that – we don't have a lot of time to fix that. I don't think this government has a lot of time to fix it because these governments, even if it's a new government, they hit the wall in about 12 months, right? They own everything their predecessors did and then they own their own stuff. And Mostafa made the point about the prime minister and his forward guidance kind of talking about maybe resetting expectations about –

the volatile environment, that is probably resetting some expectations, right? I think being realistic. But I'd like to see where we are on these projects, every fiscal allocation they've made. Like when are we going to see shovels in the ground? Where are we going see progress? I think that's a very important point because what I think we would like to see in the Budget or in the Update or maybe

even separate from the Budget and Update is some kind of a report from the government on a regular basis on providing progress in these major ideas and programs. Like the Defence spending, the pipelines or whatever else, infrastructure, plans that they have, attracting investment, foreign direct investment, how is that doing? And in fact, actually,

It's interesting, I was looking at some of the numbers. We had a big jump in the foreign direct investment in 2025 relative to 2024, which is sort of surprising. It hasn't happened for many years. And suddenly in 2025, we had this jump in foreign direct investment. So anyway, I mean, these are the kind of things that they can report on and provide that to Canadians to sort of to tell them

where they are going? Are they executing their plans or are there other issues that they need to address? Kevin, you said this is a communication document, it's a political document. So why not put that kind of information in this kind of a document? I'm with you. And I recall that in 2009-10 under Prime Minister Harper's government, with lots of pressure from the opposition, they had quarterly reports. Yeah. And where they were with respect to the implementation of stimulus. So maybe there's something we could learn.

But I like to close because this is Politics of Money. I like to close a little bit on the politics. I know that the media has been calling you guys. I just want to get your sense of where where's the level of energy around this update? Is this going to be an important document for the government? And we've had some notable changes. The government certainly had some victories with respect to by-elections. They have this fragile majority.

The polling numbers for the prime minister are good, but so is this an important document for the government in terms of maintaining momentum? Sarah, what do you think then will close with Mustafa? Yeah, look, I think the politics and we're not political experts, but we can certainly say they translate into some better processes for this government. If this government was worried about committees, for example, well, that composition just changed. Right. If they were worried about, you know, longevity and could they drive

know, changes in the bureaucracy and the senior public service to get execution delivery. I don't think they have to be worried about that. Could they attract the talent that they need on delivery? I think they have levers now. I think they have runway. So I think now the question is, if you've got kind of a political tailwind, can you use it? ⁓ But I think it has to be constructive. I think it has to be towards delivery so that we see results. This is a national project with national sacrifice.

We really actually now need to see this government demonstrate the progress, right? Yeah, I think so. I see and hear some excitement and some energy among the media and people around about what is going to happen, especially now that the government has a majority. A lot of people expect that this outlook this update that we are going to see next week. It's going to reflect some of that energy in the government because the government now has...

as Sahir mentioned, has another three, four years to go with this and that they have that room to function and people have higher expectations now.

So one thing I'm looking for, and I'd be interested in your folks take on this, is that I think there are still some transparency gaps in our document. given at this moment of time, it's here talked about, it's a hinge moment, there's going to be this significant ramp up in spending for National Defence. The planning document that we had in the November Budget did not have a separate line for National Defence. Even though we know that

tens of billions of dollars every year is going to go additionally to National Defence towards the NATO target. So just your thought about transparency. And then just a comment about now, PBO, we had just a recent announcement that Annette Ryan is going to be the new PBO. What might we expect from the PBO in terms of the next number of days or weeks with respect to the spring Update? Maybe you start with Mustafa.

I think on your first point in terms of the defence line in the Budget, I think that's absolutely necessary, given how much money we are planning to spend on defence. They really need to show that. I think the idea that we mentioned earlier that we need quarterly reports on some of these major products and major plans, I think that's also important. If you remember, we actually had a role in this in 2009, 2010.

with the Harper government when we actually met with the Minister of Finance and we suggested that this would be needed. And eventually they agreed and they did. Now there was obviously pressure from the opposition to do that.

Yeah, I think with the PBO now kind of confirmed, a really good opportunity for the PBO in fact maybe to lead on some of the stuff, which is start to put the information

request into the government for this type of information that helps parliamentarians, you know, really debate these issues, right? And I don't think a majority government is an excuse for parliament to kind of down tools. And I think, you know, if you think about some of the reporting that we initiated, you know, on infrastructure spending and the stimulus spending, letting parliamentarians know kind of to the best of our abilities what's going on. And in some cases that did kind of encourage the government to put out its own reporting.

So, that's certainly something where the parliamentary Budget officer can lead. If the information gaps kind of persist, then I think that's a great role for the PBO to kind of say, okay, well, parliamentarians still need to know. They still have to appropriate money to this government for their estimates and really difficult to do that without having enough information. So, what a good opportunity for the new PBO.

Thank you very much. I think we can close on that. I think we're all looking forward to this Fiscal Update. We'll be back to you after the Update with what we saw in the document and some comments on that and on next steps. Thank you very much.