Well, it has been an exciting couple of days in Canada on the policy side given the juxtaposition of the following news: 1) the federal by-election results suggest a more competitive political environment for the federal Conservatives in the stronghold of Alberta 2) the world-class City of Toronto is deposing its Mayor over a conflict of interest involving a high-school football team 3) the federal government is raising the limit on tax-free savings account contributions by 500 dollars and 4) Mark Carney is heading off to the Bank of England. What’s the connection?
Mark Carney is to be congratulated on his new position. He has the talents of a high caliber international performer when it comes to banking and finance and this appointment is a recognition that he was not being utilized to his full potential when it came to the economy he was dealing with. In some respects, he was a thoroughbred being used to haul a chip-wagon. Going to the Bank of England will allow him to apply his talents more fully on both a national as well as the international stage. While the Bank of Canada has always been a class operation with a solid record, the remainder of the economic and political environment he leaves behind is a testament as to why he needs to leave for the sake of his own career development.
While Canada continually touts itself as a stable country that was one of the best performers during the recent global downturn, the fact remains that it is a small country that rarely punches above its weight. Part of this seems to be the result of a rather peculiar political culture more focused on local and regional issues rather than international ones. The external environment should be a larger preoccupation given our economic dependence on international trade. After all, if one looks at our largest city, it is mired in a rather comic conflict of interest case rooted in the election of a rather comic mayor. Yes, the mayor has broken conflict of interest guidelines but over a high school football team? On a world political stage, this is rather junior high. The situation is more serious in Quebec with the corruption inquiry underway but that is hardly reassuring.
Of course, one may argue that all this is irrelevant as Canada is being governed with a stable majority government with an eye on the country’s economic future but even that seems rather precarious in the run-up to the election. The recent by-election in Calgary, a Conservative stronghold, was a more competitive race than expected. Maybe it was just personalities but it reminds us that the coming federal election could easily be just as competitive and result in another minority government. A lot depends on whether the Liberal Party puts forth a credible leader that bolsters its vote share, whether the Orange Wave continues, as well as how much the economy slows down over the next year, undermining the reputation of the Conservatives as economic managers.
Combine an insular political culture with the political change and uncertainty of another minority government, a slowing economy, declining housing prices, high public and personal debt loads, and you have a recipe for a much more challenging political and economic environment. The strength of our economic institutions going into the recession was a key factor in our weathering the recent downturn but this was also a form of good fortune and may not work twice especially given the rising debt load. Mark Carney was particularly concerned with the high debt loads facing Canadian households and has repeatedly warned that they needed to get their household finances in order given the inevitable rise in interest rates. The federal move to raise the contribution limit on tax-free savings account by 500 dollars can be interpreted as affirming this concern and a gesture towards providing an incentive for households to save more but it will do little to reduce household net debt.
There is really little more Mark Carney can do in Canada to deal with this set of economic issues. His work is done. The key issues coming down the road for the world economy after four years of recession are when will interest rates start to rise and by how much? Mark Carney will have much more influence over international interest rates as head of the Bank of England than as head of the Bank of Canada. Mark Carney is going to England and he will be there when interest rates start to rise – as they inevitably will. His departure is an important signal.