Understanding Canada’s Fiscal Outlook with Bill Morneau

Bill Morneau served as Canada’s Minister of Finance from 2015 to 2020 under Prime Minister Justin Trudeau. As Minister of Finance, Morneau tabled four budgets and served as Governor at the International Monetary Fund and the World Bank. Prior to entering politics, Morneau was the President of his father’s company Morneau Shepell, from 1990 to 2015. Under his leadership, the company grew from a 200-person operation to Canada’s largest provider of human resources services valued at CA$2.3 billion (US$1.7 billion). Morneau currently serves on the Board of Directors at the Canadian Imperial Bank of Commerce, and is a best-selling author for his January 2023 book titled “Where To From Here: A Path to Canadian Prosperity.”

In 2017, as Minister of Finance, you released the first gender-focused budget that created more inclusive growth targeting child care, parental leave, and female workforce participation. Six years after these policies were enacted, how has the landscape of economic prosperity altered across gender lines?

First, I think it's worth understanding what we were trying to achieve. We saw historical challenges for women being as successful in the workforce as men. From our perspective, that meant that we didn't have nearly the economic advantage that we should have from the breadth of Canadian talent. Our goal was to make sure that we took efforts to right that challenge. We did that by trying to put support in place that made sense and [that would ultimately] improve workforce participation among women because we saw that [as] one of the single most impactful things we could do. There's an obvious gap between men and women, and we saw that as critically important [to address]. Also, [we] wanted to make sure that we made efforts [to achieve] equality in pay for women and men. Those were a couple of the key initiatives.

[Now], looking back on it over the last six years. First of all, I think we'd have to do a statistical review to give real clarity on that, but I do think we've made progress in a number of areas. I believe that what we've seen—which has been distorted because of the COVID era—is a greater focus on women's success in the Canadian economy. We have seen this from [policy focusing] on places that are going to have a longer-term impact, like childcare. This will be helpful in making sure that the burden from child rearing is shared more equally between men and women. My expectation is that it will lead to significantly better outcomes.

Your budgets made significant investments to tackle the opioid crisis, improve the living conditions of Indigenous communities, and took the first steps towards establishing a national pharmacare program. What spurred this progressive spending on historically unaddressed issues?

We came in at a time where we recognized that we were facing low productivity growth. The idea behind my initiatives was to try and address that. So focusing on gender, in my estimation, was critical because we needed to [increase] the ability for one half of our population to be more successful, which would help all of us. Ideas like childcare are clearly economically advantageous. If we can find a way to allow people to be in the workforce, we [can] create some real advantages.

Pharmacare was an issue of a different order. Clearly, there is some unfinished business with Canadian health care as the healthcare system is under significant stress. The idea of having pharmacare coverage for all Canadians, however it's delivered, is not only important for individual health, but obviously very impactful for the overall system’s effectiveness. If people can't get access to pharmaceutical products because of [their] inability to pay, then [this has] an additional burden on the healthcare system. It's a continuing frustration that I have, that we haven't made more progress on this file. [With my budget], I saw practical ways to move us forward that were not taken up [before] because of ideological concerns over exactly how pharmaceutical coverage was delivered.

A younger Prime Minister Trudeau in 2015 would proudly proclaim “in Canada better is always possible,” so Mr. Morneau, how can the country achieve better when it comes to balancing a progressive agenda with rising deficits?

My sense right now is that the number one issue we need to be focused on is productivity and growth.

We will be in a very difficult situation for the next generation if the current forecasts for long term economic growth come true. That means we need to be thinking seriously about how we actually enhance our productivity and increase our investment in research and development, and our investment in our economy, so that we actually have better outcomes.

My sense is that the only way we can adopt progressive policy is if we have a strong economy that provides the foundation for funding. That is the unfinished business of my work in office. Some of the things that we did that were particularly important: the Canada child benefit and the increase in the Canada Pension Plan. These are going to have a long term impact on low and middle income Canadians. In order to have the kind of impact we want for the future, we have to provide growth in the economy. This means that we need to be thinking about that as a first order issue. In that regard, I think there's much, much more to be done. The challenge we will face is if we don't get at some of the long standing challenges, we will not be successful, and we certainly won't be successful in comparison [to the other OECD countries] that we think we should be successful against.

During the pandemic, both monetary and fiscal policy were attempting to stimulate the economy in a time [when] Canadians undoubtedly needed assistance. However, do you think that these expansionary policies played a role in taking the country to its current state of excessive inflation?

When I look back at the early COVID period, I believe that we had no alternative but to support Canadians, and [to] support Canadians massively. We had people that were off work with literally no way to pay for groceries or rent. That said, what you want to do is find a policy that's suitable for the challenge that you're facing; supporting people was critical. The challenge that I faced in trying to manage that level of support was to [try to arrive at a consensus where everyone agreed] consensus that the support should be tailored to the problem and it should be tapered off as the problem declined in scale.

To answer your question, I think the early efforts were appropriate and important. They were, in a number of cases, too large, [but] that was not purely a Canadian issue; there were other countries that had the same problem. The bigger issue was [that] they went on for too long, and that meant that we put more money into the economy than we needed to. [This] is, of course, one of the reasons that we find ourselves with demand for goods and services that's in excess of what the economy [could] support as we came out of COVID. And when demand is in excessive supply, the inevitable result is inflation.

I can't tell you that we understand exactly what each and every determinant of [the current] inflation is. Clearly, supply chain problems were a big challenge. The rapid change in the situation was [another] big challenge. But, the support, which was larger than necessary, is at least one of the factors that needs to be considered [as a reason for the inflation that we are now facing].

In my view, what we need to make sure we do now is to take the appropriate steps to make sure that fiscal policy is not thwarting the efforts of monetary policy to bring down the inflation that we're facing.

I want to stay on inflation. In Canada the current inflation rate sits at 5.2% [as of March 2023] which is substantially greater than the Bank of Canada's target of 2 percent. Do you believe in the 2 percent target or should the Bank of Canada aim higher?

The merits of maintaining the 2 percent target are clear, people have a set of expectations [based upon] that target over a long period of time, and the credibility of central banks in maintaining such a target is important. In my estimation, what we need to be doing is [making the efforts required] to move us towards that target. [Note that] the target was always in a range, in Canada, of 1 to 3 percent. I believe that the bank needs to continue moving towards the target of 2 percent [while] recognizing that getting it exactly right, is of course not the goal. But, getting us in the right direction [to be able to approach] the target is what will not only support a strong and healthy economy and give people confidence, but also enable us to see that the tools that we have are fit for this purpose. And the monetary policy tools, while blunt, I believe are the tools that will help us get back to the place that we need to be [to have] confidence [about a future that has]  a more stable economic situation.

I want to zoom out and look at the broader global economy. We have seen bank failures in Europe and the United States, and central banks around the world continuing to raise interest rates with the Fed recently announcing another 25 basis point hike. With this current global economic situation, is Canada headed toward a recession?

Inevitably, when interest rates go up, there is a reduction in investment in the economy. The question that we're facing now is whether we'll be able to find a soft landing or whether we will find ourselves in a more difficult situation. It seems clear that there are mixed opinions among economic forecasters. My hope is that we will be able to find ourselves in a position where we will have the ability to reduce inflation through measured and appropriate central bank decisions, and that we won't create more problems through fiscal actions that will then make [the central bank’s job more difficult]. My hope, of course, is a soft landing.

Issues like what's gone on most recently with bank failures in the United States create, on one hand, challenges for the banking sector and confidence challenges for consumers. But, on the other hand, they do reinforce the efforts of the central bank by tightening up access to funds, which does have a clear impact on inflation. So I'm not sure that [recent bank failures] necessarily change the hopes for a soft landing. Perhaps [recent bank failures] make the job of the central bank more complex, but it [might also mean that they will] not need to take as much action as they would otherwise have needed to take.

This soft landing that you mentioned places a large responsibility on fiscal policy and those key decision makers. It has been three years and an election cycle has passed since you have been Minister of Finance, yet many still argue that no person in the government has comparable financial experience compared to you. With that being said, should Canadians have confidence in the current Trudeau government making fiscal policy and leading the country through this tumultuous economic time?

The good news for Canadians is that we have a strong and effective public service that supports the efforts of politicians and ministers in coming to the right economic policy. My hope is that the people in positions of power, listen and understand the wisdom of those that are trying to move us forward on the appropriate fiscal policies.

I think that we continue to benefit in Canada from the separation of the central bank from the government. This allows the Bank of Canada to independently assess what is the most appropriate action in supporting our efforts to get the economy to a more stable situation. So I remain of the view that we do have some strong people at the helm. They are well supported.

I will say that something I'm quite passionate about is that we constantly need to be on the lookout for experienced people to be brought into public life. I think experiences with private sector investment can be helpful when facing public sector challenges. That's a long-term goal of mine, to continue to advocate for people with all sorts of backgrounds, not only from business and economics but also from broader walks of life, to take the plunge into public service. It’s a plunge that's fraught with challenges — it's not easy to be in public life—but one that can be enormously rewarding because of the positive impact you can have on your fellow citizens.

Morneau also discussed his political career in an additional interview titled "From Political Glory to Heartbreak: An Interview with Trudeau's Former Finance Minister Bill Morneau." Mete spoke with Morneau in March, 2023. This interview has been lightly edited for length and clarity.