Bank of Canada Governor Stephen Poloz held open the door for the Liberal government to bring in a bigger stimulus package in its budget, and a bigger deficit.That wasn't the central banker's goal, of course. The bank decided not to cut interest rates (again) on Wednesday because of the risk that it would send the low Canadian dollar sliding further, and spark another set of ills with inflation.
But Mr. Poloz's assessment of Canada's economy came with another implication: It's time for the government, rather than the central bank, to take over efforts to stimulate the economy.
The effect of Mr. Poloz's assessment will be to give Prime Minister Justin Trudeau's Liberal government political cover for bigger deficits.
The Liberals were going to run those bigger deficits anyway when they table their first budget, but they faced political recriminations for exceeding the $10-billion limit for deficits they promised in the election campaign.
Now Finance Minister Bill Morneau will have some bank-inspired talking points when he breaks that cap and presents a budget with a $20- or $30-billion deficit.
Mr. Poloz's assessment helps. First, the economy is going to be weaker than was expected just a few months ago; the bank now predicts Canada's real gross domestic product will grow by 1.4 per cent in 2016, rather than 2 per cent. Second, he suggested it's risky to use further rate cuts to boost growth, because that would cause depreciation of the dollar that could trigger inflation. And third, he said a fiscal-stimulus package in the government's budget would boost the economy.
It is, according to McGill University economics professor Chris Ragan, the technocrat's assessment. The bank had cut rates twice in the past year, and sliding oil prices led to a sharp drop in the dollar. "Let's admit monetary policy has run out of steam and fiscal policy hasn't even started," he said.
But it's also politically useful for the Liberals. They can use Mr. Poloz's assessment to argue the economic outlook has worsened since the election, justifying larger deficits for fiscal stimulus.
It's an unusual position for Mr. Poloz. The Bank of Canada conducts monetary policy independently from the government. Mr. Poloz was appointed in 2013 by the Conservatives. But his assessment Wednesday provides an argument for the Liberals.
There have been times when a central banker and finance minister seemed to work hand in hand. Mr. Poloz's predecessor, Mark Carney, echoed the same notes as late finance minister Jim Flaherty about the overheating of the housing market. The two co-ordinated closely through the fear of the 2008-09 financial crisis.
It's not clear there's as regular co-ordination now. Mr. Poloz and Mr. Morneau meet, as mandated by law, but neither the Bank of Canada nor Finance Canada say much about such meetings. Mr. Poloz said Wednesday he doesn't know what kind of stimulus package Mr. Morneau plans.
At any rate, though appointed by Conservatives, Mr. Poloz now appears to be on the same wavelength as a Liberal finance minister: He's suggesting it's time for Finance to take over efforts to boost the economy, and that's just what Mr. Morneau has in mind.
Mr. Poloz even said that the bank's projections for slow economic growth in 2016 should be viewed as carrying an asterisk. They could be boosted by a government stimulus package in the budget, he said.
The Liberals won't need more invitation. They came to power promising a dramatic expansion of infrastructure spending to boost a slow economy. Now they'll boost more.
Polls suggest the public wants an interventionist approach. But the problem is the promise that deficits would be no higher than $10-billion. After taking office, the Liberals argued the books were worse than expected, and sought to wriggle out from that $10-billion cap. But it was always going to be hard, politically, to make that case. Mr. Poloz's assessment helps.
Of course, that will be cold comfort to Mr. Trudeau's government if economic growth remains weak. The Liberals didn't cause oil prices to plummet, but that doesn't mean they won't be blamed if the Canadian economy remains slow for years.
But this year, when political opponents blast them for broken promises and higher deficits, and try to undermine their credibility in economic matters, the Liberals will point to Mr. Poloz's assessment to argue that the economy took a post-election turn for the worse, and their stimulus was the only way to respond.