Here Are Reasons Why Canada’s Economic Policy is Winning Fans

MORE than seven months after the affable leader of Canada’s Liberal Party, Justin Trudeau, became prime minister, there is no sign of an end to his political honeymoon. Polling shows that the Liberals are just as popular as when they swept into power, while Mr Trudeau is the preferred prime minister of more than 50% of Canadians, compared with 35% at election time. Nor is it just voters who have fallen for Mr Trudeau: his government has won plaudits from the IMF and the G20. Moreover, the Liberals have done so through higher fiscal spending, going against conventional wisdom in rich countries. How has Mr Trudeau done it?

This time last year, Mr Trudeau was a long way from occupying 24 Sussex Drive. Before October’s election, the Liberals were engaged in a tight three-way race with the ruling Conservatives and the centre-left New Democratic Party. Weary after almost a decade of Conservative rule, the Liberals nonetheless needed a policy to distinguish themselves from the NDP, with whom they were at risk of splitting the left-wing vote. Mr Trudeau abandoned previous pledges to balance the budget (as his opponents were promising) and instead pledged to spend C$125 billion ($96 billion) on new infrastructure. Voters loved it, the Liberals had a hook to campaign on and the NDP vote collapsed. The Liberals won a parliamentary majority.

Since then, Mr Trudeau has been praised for appointing a diverse cabinet, showing rare compassion to Syrian refugees and looking good while standing next to Barack Obama (pictured). But the approval of the IMF and the World Bank showed that there is more to Mr Trudeau and his government than a well-paid PR agency. When his finance minister, Bill Morneau, handed down the new government’s first budget in April, the size of the federal deficit for 2016/17 was almost C$30bn, or nearly as much as Mr Trudeau had promised over four years. Yet it found favour with international organisations. In its most recent assessment, the IMF said it “welcomes” the additional spending; high praise from such a prosaic organisation. Other economists joined in: Paul Krugman described the plans as “truly responsible fiscal policy”. And the G20’s most recent communique pledged to use flexible fiscal policy to stimulate growth, a nod to the fact that many of the club’s other members should follow Canada’s lead.

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What the Canadian government is doing is little more than common sense. A big exporter of oil, Canada is suffering a slump in investment thanks to low oil prices. Its economy needs a boost and, at a time of extraordinarily cheap credit, the government is borrowing more in order to support growth. Since the financial crisis, developed economies have insisted on running tight fiscal policy to reduce debt while relying on very low interest rates to stimulate demand. So far, that strategy has been no more than a qualified success. Growth has been moderate and demand has not picked up sufficiently to lift interest rates from the floor. Canada is in a better position than almost any other rich country to take advantage of low rates: it didn’t suffer a big downturn after the financial crisis, and it has a history of fiscal restraint. But it is still a bold experiment. Others could benefit from Canada’s bravery.

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