Freeland should be wary of more federal spending

Opinion

Friday’s Labour Force Survey for February found employment holding steady in Canada from January to February and the unemployment rate holding at five per cent. The data suggested the Canadian economy was recovering nicely from the depressing effects of the COVID-19 pandemic.

The sudden collapse on Friday of the California-based Silicon Valley Bank, however, showed there are weak spots in North American industry that could trigger a wider loss of confidence, leading perhaps to a recession.

Finance Minister Chrystia Freeland has promised a federal budget for March 28 in which she must support economic expansion and employment growth without adding to the inflation already impoverishing Canadian households.

She should curb the free-spending method that helped Canadians through the pandemic. She should keep some room to manoeuvre in case she needs to cut taxes or launch new spending programs to fight a recession.

Employment grew rapidly in the late months of 2022. Employment trended upward since September. The number of employed people in Canada reached 20,054,000 in February, an increase of 348,000 since August.

The Bank of Canada has been raising interest rates rapidly for the past year in the hope of curtailing business expansion and employment growth as a means of curtailing the inflation that has driven up consumer prices.

The February employment data suggested employment growth has slowed down from the rapid pace set in December and January.

Bank of Canada governor Tiff Macklem and his colleagues believe the interest rate increases they had already imposed will slow Canada’s economic growth in the second half of this year. They announced a pause in rate increases to await developments.

The latest development was failure of the Silicon Valley Bank, whose inventory of U.S. government bonds had dropped sharply in value on account of rising U.S. interest rates.

Reuters reports that these higher interest rates caused the market for initial public offerings to shut down for many startups and made private fundraising more costly. As such, some Silicon Valley Bank clients started pulling money out of their accounts to meet their liquidity needs.

In turn, the bank went looking for ways to meet its customers’ withdrawals, and sold a US$21-billion bond portfolio of mostly U.S. Treasuries at a US$1.8-billion loss, and announced a US$2.25-billion sale in common equity and preferred convertible stock “to fill its funding hole,” according to the Reuters report.

With shares trending down 60 per cent on Thursday last week, other SVB clients pulled their money out on the advice of venture capital firms, which spooked investors off the stock sale, ultimately collapsing the bank’s efforts to raise capital. As a result, California bank regulators put the bank out of business on Friday, and federal authorities urged calm to prevent a wider run on the banks.

Could such a banking failure that shakes public confidence happen in Canada? While not impossible, our system appears more resilient.

The Financial Post reports that — unlike SVB, which catered to niche tech startup companies — Canada’s big banks dominate their home market and “are diversified across industries and business lines.”

Bank of Nova Scotia analyst Meny Grauman told the Post that the banking crisis down south “should actually be viewed as further vindication of the Canadian banking model, which is dominated by a few large and diversified players.”

Nevertheless, Ms. Freeland can draw some lessons from the Silicon Valley Bank failure, particularly when it comes to financial decisions made in times of high interest rates and rising inflation.

As long as she has been finance minister, Ms. Freeland has been pouring borrowed money into the hands of Canadian households and businesses to overcome the effects of the pandemic. If the Bank of Canada induces a recession by its high interest rates, she will need every dollar in the federal treasury to finance the new programs and tax cuts that would eventually pull the country out of recession.

Governments typically express their values by promising generous spending on purposes such as better health care and a cleaner environment.

If, however, Ms. Freeland follows that pattern and spends every available dollar on worthy projects, the recession that may lie ahead will put her in a tight spot. It would require her to borrow heavily once again in the bond market and drive up inflation once again.

Canadians will not thank her for borrowing and spending in such an open-handed way. It is time to look at tightening the federal purse strings while we can.

» Winnipeg Free Press and The Brandon Sun