Canada needs to be a global economic role model -- even if its prime minister doesn't want to cause a scene

Canada needs to be an economic role model for the rest of the world.

Prime minister Justin Trudeau, however, thinks Canada can be a “leading voice” against austerity policies, but isn’t sure Canada needs to be all, well, American, about it.

And this is a mistake.

In an interview with Bloomberg News, Trudeau was asked about Canada’s decision to run deficits and act as an example against the austerity tendencies — that is, governments either balancing budgets, running surpluses, or limiting deficits in the face of rising debt-to-GDP ratios — that have dominated Western economies since the financial crisis.

And while Trudeau thinks Canada can and should be an example, he doesn’t think the world needs to hear about it. He’s wrong.

Here’s the exchange (emphasis mine):

[Bloomberg]: Can Canada be a leading voice globally against austerity?

[Trudeau]: I think we should. I think there’s certainly an example we could give. I think making sure monetary policy and fiscal policy are aligned and complementary is obviously a benefit to any economy. But at the same time I don’t want to be overly preachy. … I’m very aware that we’re in a particular situation but that doesn’t mean we can’t encourage people to think about the kinds of things we’re going to do effectively in a way that suits their own economies. I think the last thing Canada needs to be is either preachy or bombastic or “hey look at us, we’re the best, do what we do or else you’re doing the wrong thing.” That’s not what people need to hear from Canada.

But the thing is: this is exactly what people need to hear from Canada.

In 2015, Canada’s economy and financial markets had a rough year.

GDP grew just 1.2% in 2015 — with a two-quarter contraction to start the year dragging the economy, technically, into recession — as the benchmark TSX stock exchange fell about 10% and the Canadian dollar got slammed, losing about 15% of its value against the US dollar.

In response, Canada is expected to run deficits equivalent to 0.1%, 0.2%, 0.1%, and 0.1% of GDP, respectively, in each of the next four years. Over the same period, the US will run deficits of 2.4%, 2.2%, 2.1%, and 2.2% of GDP.

Of course, the US and Canada can’t be expected to conduct their fiscal affairs in exactly the same manner. But this example shows that the US, while still in a fairly restrictive fiscal environment, is running a deficit much larger than Canada’s, indicating that Canada can and should go further.

Again, this is about setting an example on how to reject the received wisdom of the last several years.

Interest rates around the world are low and investors still have an appetite for Canadian debt — the yield on 10-year Canadian bonds, for example, is around 1.24% — which would likely allow Canada to run an even larger deficit to kickstart economic growth that would not be overly onerous.

And with things like a potential bailout of Quebec-based plane maker Bombardier and rising unemployment in Alberta — Canada’s most oil-dependent province — still plaguing the economy, there is no reason not to be more aggressive.

Last week, Business Insider’s Bob Bryan spoke with BNY’s
Raman Srivastava who said fiscal stimulus is really what the global economy needs, and yet the political appetite simply doesn’t exist anywhere in the world for this to happen.

Except, of course, in Canada.

The US election season makes discussion of running a large deficit to spur public investment here a complete non-starter. And the tight grip that pro-austerity politics have in Europe make hopes of anything changing there far-fetched.

European Central Bank president Mario Draghi has been outspoken in calling for fiscal packages to come alongside the ECB’s move to buy €60 billion of assets each month while also maintaining a negative interest rate policy. More asset purchases and even lower interest rates are expected to be coming from the ECB, too.

And in the US, Federal Reserve officials — while continually being asked about negative rates and challenged by market commentators on their ability to raise interest rates again — have said that contractionary fiscal policy has been a drag on growth.

Both Draghi and Fed chair Janet Yellen, then, know that the next big wave of economic growth is in the hands of lawmakers who don’t want to make the hard choice to issue more debt and expand government spending to spur growth.

Fortunately, Canada has a newly-elected prime minister who ran on a platform of running deficits in power. He should press this advantage.

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