Oct 16, 2020
Osler Special Advisor Stephen Poloz says that fiscal policy should be the “primary tool” to help Canada’s economy recover from the effects of the COVID-19 pandemic, as monetary policy “has done most of what it can deliver.” Stephen, former Governor of the Bank of Canada, made his comments during an interview with host Amanda Lang at Bloomberg’s virtual Canadian Fixed Income Conference, which was the subject of Shelly Hagan’s article in Financial Post.
Watch the full Bloomberg interview, “Former Bank of Canada Governor Poloz on Stimulus, Easing.”
He says that one of the first things he learned in responding to the pandemic was that “central banks can do quite a lot to avoid financial crises. Most central banks acted very quickly, with force,” and much faster than the 2008 financial crisis. “The second thing, because we started all this close to the lower bound of interest rates, we knew all along that fiscal policy was going to be needed, but we also think of that in a technical way, and when it comes to the actual execution, politics really matters. Fiscal policy was never built for speed…so I think the lesson of that is it’s better for us to develop more enhanced, stronger, automatic fiscal tools, so that they work without debate.
“But the bottom line is that good fiscal policy can avoid the need for negative interest rates, which I think is a good thing for everybody.”
As outlined in the article, Stephen also says that as the economy returns to normal, cash will flow back into the system and central bank balance sheets will “shrink automatically.”
The main question is “the sustainability of the fundamental debt that’s being drawn down by governments,” he says. “And that, of course, is something we have to understand better. We could be well over 100% of GDP by the end of next year, according to [an International Monetary Fund report that estimated Canada’s general government gross debt will rise to 115% of GDP], for the major economies. Those are big numbers – we’re just not experienced with that. And so, provided the interest rates stay low, and it looks like they probably would, it’s more of a debt service issue, just like it is with a household.
“So, in the end, I think that sustainability criteria can be met provided that the government money’s being used for productive reasons.”
He also says that “in real terms, interest rates are likely to stay low for a generation.”
For more of Stephen’s insights, read Shelly Hagan’s article “Bank of Canada is close to its policy limits, Poloz says,” in Financial Post. In an Osler client event, Stephen also provided in-depth remarks on the economy, inflation and COVID-19.