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Stephen Poloz, the former governor of the Bank of Canada, was pleasantly surprised by Finance Minister Chrystia Freeland’s new financial plan.

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“The budget exceeded many people’s expectations,” said Poloz, who retired as governor in 2020, in an interview with Larysa Harapyn of the Financial Post this week.

“Of the budgetary space that was on the table, only about half has been deployed in new programs. The rest was aimed at reducing the debt-to-GDP ratio over time a bit faster than it would otherwise, which I think is a bit of a success given the political situation we find ourselves in.

Pause on that last thought. Poloz doesn’t like the political class these days, so a kind word is in order. It’s not personal; he said that the job of a politician had become one of the most difficult occupations. But this degree of difficulty is the problem. He states in his book, The new era of uncertaintythat modern politics is incapable of great things because practitioners have devoted themselves to polarized vote banks.

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“I think the coming tectonic strains will prove too much for the capacity of existing fiscal and monetary stabilization tools,” he wrote. Therefore, given the “political challenges” that will hamper an overhaul of existing policy, “policy makers will not be able to absorb all of the increased risk that tectonic forces will bring.”

Poloz finished his book last year. Its prospects have been brightened by Donald Trump’s presidency in the United States and the embrace of “voting efficiency” in Canada, where Prime Minister Justin Trudeau’s Liberals have formed successive minority governments despite losing the popular vote. . Few positive results have been achieved by policy makers in either country. The kind of compromise required to bring about anything other than incremental change was incongruous with the electoral strategy.

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The Trudeau team will need more than a relatively well-received budget to restore its credibility with the business community. But perhaps Russia’s invasion of Ukraine has brought a new level of seriousness. Trudeau’s power-sharing deal with the New Democratic Party promises several years of stability, which would at least partially offset the political risk that has weighed on investments in recent years.

Leaders and investors might not like some of the terms of Trudeau’s deal with NDP Leader Jagmeet Singh, but at least they can base their spending plans on the assumption that there will be no disruptive federal elections every two years.

Admittedly, the new budget is far from perfect. If the most pressing short-term problem is inflation, then Freeland probably should have used more of its windfall revenue to reduce the deficit. His act of relative restraint “does not change the fact that this year and next year we are running quite large deficits, over one percent of GDP, closer to two percent of GDP, at a time when the The economy is fully engaged, more than fully perhaps, in excess demand already,” Poloz said.

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“To the extent the government actually gets that spending, it adds to those (inflationary) pressures on the economy this year and next. It would be better if it wasn’t. »

Still, the former governor acknowledged that some of Freeland’s policies could help offset inflation by making more workers available to fill an unusually high number of vacancies. For example, the national child care program should increase women’s participation rates in the labor market. Poloz also said the federal government’s commitment to speeding up visa processing and revamping the temporary foreign worker program will help address a labor shortage that threatens to fuel inflation in putting upward pressure on wages.

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“Inflation risk is a demand and supply problem,” he said. “These are the people who will fill the surplus vacancies that we have in the labor market. This will remove some of the inflation pressure from the system.

Another element that would offset inflation is higher productivity. Freeland’s answer is the Canada Growth Fund, which it intends to endow with $15 billion that a team of professional investors will use to persuade private investors to make big bets on Canada.

Poloz, who headed Export Development Canada when he was named governor of the Bank of Canada, said the scheme could work, but only if politicians eventually walk away. Trump’s protectionist policies redirected North American investment to the United States, as companies concluded that was the only way to avoid tariffs on imports from Canada or Mexico. Today, these companies are considering where they will expand to take advantage of post-pandemic growth.

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They might need the kind of “catalyst” that a $15 billion fund could provide, Poloz said. Still, “it’s going to put on weight,” he said. “You can’t just put this in the window and expect everything to happen. That’s going to take a lot of dialogue and you have to make sure that companies not only have that, but that they know clearly that if they make an investment 10, 20, or 30 years ago today, it’s still going to be valid 10 years ago years.”

The agreement between the Liberals and the NDP should bring at least a few years of clarity. Inflation will become less scary if the country’s business leaders and political leaders use this time wisely.

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