Growth, not taxes, will pay for pandemic spending: Poloz

Governments can grow themselves out of the debts incurred from pandemic spending without relying on higher taxes to pay the bills, former Bank of Canada governor Stephen Poloz says.

Speaking Tuesday at the Portfolio Management Association of Canada’s annual conference, held virtually this year, Poloz pointed to the post-war period in the 1950s when debt levels were similar to where they are today.

“People acknowledge that we grew our way out of it,” said Poloz, who, since leaving his post at the central bank earlier this year, is now a special advisor at law firm Osler, Hoskin and Harcourt LLP.

Governments can do the same thing today, the difference being that rates are much lower and will likely remain so “for a full generation,” he said. This means less dramatic growth than the post-war period is required to steadily pay down debt.

“We should be doing everything we can to maximize the trend line of economic growth,” Poloz said, rather than “searching around for clever ways to increase taxes without people really thinking it’s higher taxes.”

Governments can reduce impediments to growth, such as inter-provincial trade barriers, and invest in childcare as Quebec has done to encourage female workforce participation.

“That’s the sort of thing we need to do to buttress the long-term growth line and that will allow us to pay for the debt that we’re incurring today,” Poloz said.

When asked about the possibility of negative interest rates, Poloz said they’ve been used in situations where central banks had their backs to the wall with no help from fiscal policy.

“If you’re the only game in town, you have to use everything in the tool kit,” he said.

However, he said the effect of negative rates on the economy is limited. Going a couple of basis points below zero may pull down the longer end of the yield curve, but it may also cause distortions in financial markets while doing little more to prime the broader economy. Those extra basis points won’t encourage people to go out for dinner or book a vacation, for example.

“The economy is still weak but it’s all in the bottom part of the K,” he said, referring to how economies have rebounded asymmetrically during the pandemic. “Interest rates don’t do anything for the bottom part of the K.”

Soaring housing prices, elevated household savings rates and rebounding retail sales make up the top part of the K, while the bottom part represents the growing segment of permanent job losses.

“As long as fiscal policy has firepower, and I believe it has plenty, that is the policy to lean on,” Poloz said.

Overall, the former governor was optimistic about the economic recovery from the pandemic.

“Since Covid arrived, every data point has surprised the analysts on the upside, and I expect that this trend will continue,” he said. “People are far more resilient and more innovative than most economists give them credit for, and governments are doing the right thing with highly targeted fiscal policies.”