Canadian Deputy Prime Minister and Minister of Finance Chrystia Freeland assured the country would not resort to a “slash and burn” economy to face the projected economic crisis.
On Thursday, Freeland warned that Canada needed to brace for “significantly weaker growth” as the country will likely face prolonged inflation in the coming months.
However, despite the prediction of a crisis, the finance minister announced a $30 billion new spending plan for the next six years. It will fund various public facilities, especially for economically vulnerable people. Freeland explained that in the event of economic uncertainty, Canadian people needed a “social safety net,” namely employee insurance (EI) and pension plan (CPP).
Justifying the new spending plan, Freeland said that Canada would not follow the step of England. Former Prime Minister Liz Truss announced a tax cut plan that sent the U.K. economy into a frenzy, leading to the downfall of the sterling. The U.K. government has since canceled the cut and replaced Truss with Rishi Sunak, but the sterling remains pressured by the U.S. dollar.
According to Freeland, the U.K.’s economic situation puts its pension funds “on the brink of collapsing,” leading the Bank of England to take charge. She maintained that Canada would not head in that direction.
The new spending plan faced criticisms, including one from Conservative Leader Pierre Poilievre, who described the plan as an “inflationary scheme.”
He said that the current administration did not outline budget cuts equal to the spending. Poilievre reasoned that it could further worsen inflation and hurt regular households.
In response to Poilievre’s criticism, Prime Minister Justin Trudeau argued that Poilievre had championed “failed” economic policies.
“They’re actually doubling down on the failed, old theory of trickle-down economics, which means tax breaks for the wealthy while hollowing out the middle class,” Trudeau said.
Canada’s recession outlook
Freeland did not make an outright projection of whether the country would enter a recession. Despite that, a September poll revealed that 40 percent of participating economists predicted a recession by next year. The country is projected to go into a “mild recession” in Q1 of 2023 if inflation stays above three percent and the benchmark rate is at 4.5 percent.
Canada’s probability of undergoing a recession highly depends on the ability of its central bank to bring down inflation to its target of two percent. Economists have warned that the longer it takes for the central bank to reach the target, the higher the benchmark rate will be.
Inflation data from September showed that headline inflation had slowed to 6.9 percent, down from an 8.1 percent record high in June. Core inflation data, however, remained at a steady rate.
Although the central bank will likely continue increasing its benchmark rate at upcoming rate-setting meetings, economists believe the hike will not be as high as in the past few months.
The housing market in Canada is significantly affected by benchmark rate hikes. Housing prices have dropped by an average of nine percent since February as sales plummeted due to high-interest rates.