C.D. Howe group urges retention of financial targets

TORONTO — The C.D. Howe Institute’s COVID-19 crisis Working Group on Monetary and Financial Measures is calling on governments to recommit to traditional financial anchors such as stable debt-to-GDP ratios.

In a statement released May 25, the group said, “While fiscal anchors…were necessarily set aside to finance support programs to cope with the economic shutdown, measures to stabilize finances and restore fiscal sustainability in the medium to long run are critical.”

The working group is co-chaired by David Dodge, former governor of the Bank of Canada, and Mark Zelmer, former deputy superintendent of the Office of the Superintendent of Financial Institutions. The group’s sixth meeting was held May 20.

The commentary notes that Canada is emerging from the first wave of the pandemic with high public and private debt loads and is increasingly dependent on domestic and foreign investors to finance them.

“With the loss of Canada’s fiscal anchor, maintaining investor confidence so that public and private debt can be carried at a reasonable cost is essential,” the release states.

Maintaining Canada’s target of a two per cent inflation rate must remain official policy, said the working group.

The working group also recommends the following:

Governments should make clear to Canadians how they will recalibrate and eventually remove the temporary fiscal programs currently in place, as part of a transparent plan to stabilize public finances over the medium term.

To ensure fiscal sustainability, governments will likely need revenue sources beyond tax rate hikes. One avenue is through the “digital taxation of economic rents realized by the few dominant players in these sectors” and through taxation of individuals who have benefited from large capital gains.

Any such new revenue sources must be done in conjunction with other jurisdictions so as not to be seen as an outlier, thus harming Canadian competitiveness.

Over the longer run, governments should work with their foreign counterparts to look for ways to unlock excess savings for investment, in order to increase the neutral rate of interest, the release stated.