Macklem Hails Canada's Fiscal Reset, Urges "Tough Reforms" for Sustainable Growth

Bank of Canada Governor Tiff Macklem has thrown his support behind the federal government's recent shift towards fiscal restraint, describing it as a "helpful" development in the ongoing battle against inflation. However, in a stark reminder of the deeper challenges facing the Canadian economy, Macklem emphasized that simply reining in spending isn't enough; the country urgently needs "tough reforms" to tackle structural issues and unlock its full growth potential.

Addressing the Senate banking committee, the nation's top banker made it clear that while the government's pivot away from an expansionary fiscal policy is a positive step, it merely scratches the surface.

For years, Canada has grappled with anemic productivity growth and, more recently, a concerning decline in per-capita GDP. Macklem articulated that without bold, structural changes, these underlying weaknesses will continue to hobble the economy, regardless of short-term fiscal adjustments.

This endorsement comes on the heels of the Liberal government signaling a renewed focus on fiscal anchors and a commitment to more responsible spending, as championed by Finance Minister Chrystia Freeland.

The government's autumn economic statement outlined measures aimed at trimming spending and ensuring deficits remain on a sustainable path. Macklem acknowledged this shift, noting that "We have had very strong population growth in Canada, but our underlying productive capacity has not grown as fast.

And what that means is that per capita, our economy has been stagnating."

Macklem's call for "tough reforms" extends beyond mere budget cuts. He pointed to the critical need to improve the economy's supply side, specifically citing the imperative to boost productivity and address Canada's chronic housing supply shortage.

These are not easy fixes, he conceded. "These are the sorts of reforms that are hard to do," Macklem stated, underscoring that such fundamental changes often require difficult political decisions and long-term vision. He stressed that monetary policy, while crucial for managing inflation, is ill-equipped to resolve these deep-seated structural deficiencies.

The Governor's remarks highlight a broader consensus among economists about Canada's economic trajectory.

While inflation has shown signs of cooling from its peak, the Bank of Canada has maintained a cautious stance, holding its benchmark interest rate steady at 5%. The central bank has repeatedly stated its readiness to hike rates further if inflationary pressures persist, underscoring the delicate balance between controlling prices and supporting a struggling economy.

Macklem reiterated that current interest rates are restrictive, weighing on demand, and acknowledged that the economy is indeed weak.

Ultimately, Macklem's message is a blend of cautious optimism and an urgent plea for action. He sees the government's fiscal restraint as a constructive move that aligns with the Bank of Canada's efforts to cool demand and bring inflation back to target.

However, his strong emphasis on "tough reforms" serves as a powerful reminder that Canada's economic prosperity in the long run hinges not just on careful spending, but on courageous policy decisions that foster innovation, enhance productivity, and build a more resilient, dynamic economy for all Canadians.