Let’s start this edition of the inflation diaries by replaying a clip from December 2021. 

“Today’s renewal of Canada’s monetary-policy framework is fundamental to Canada’s economic success,” Finance Minister Chrystia Freeland said at a joint press conference with Bank of Canada governor Tiff Macklem. “This is about continuity and about continuing to do what we know works.”

Twice a decade, the finance minister, with input from the central bank, sets out how monetary policy should be conducted. Then, the government leaves the Bank of Canada alone to execute its mission. The idea is to separate the decision on when to raise and lower interest rates from electoral considerations, and there’s been lots of evidence lately of why that’s important. 

It’s worth revisiting the mandate renewal because Freeland acknowledged that she, too, had a role to play in controlling inflation. Her fall economic statement on Nov. 21 will show if she was serious. 

By “continuity,” Freeland meant the Bank of Canada’s primary mission would remain keeping inflation at around two per cent, as measured by year-over-year changes in the consumer price index.

The “operating manual” Freeland gave the central bank in 2021 wasn’t like the previous one, however. It included new language that said when inflation was calm, the central bank would give greater consideration to employment. It also directed the bank to take into account inclusion and climate change—again, as long as policymakers were satisfied that doing so wouldn’t jeopardize price stability. 

Macklem said the central bank already took those things into account, so no problem—the only change was that implicit considerations were now explicit. In that spirit of transparency, Freeland put on paper something that technocrats understood, but that had never been declared official policy, by stating that the government also had a role to play in keeping inflation under control. The central bank’s new mandate concluded with this paragraph: “Finally, recognizing the limits of monetary policy, the government and the bank also acknowledge their joint responsibility for achieving the inflation target and promoting maximum sustainable employment.” 

The idea that fiscal and monetary policy should work in concert was well established. Paul Martin, the former Liberal finance minister and prime minister, recounts in his political memoir that Paul Volcker, the former Federal Reserve chair best known for ending double-digit inflation in the early 1980s, told him in 1994 that “fiscal and monetary policy were at odds with each other.” Martin said that notion informed his decision to replace John Crow, the former Bank of Canada governor who insisted on keeping interest rates high in order to get inflation near zero, and to do his part by balancing the budget and reducing debt. 

“I really believed in the virtuous circle,” Martin wrote. “My experience in business was that what made an economy go or not go was interest rates more than taxation.” 

Stephen Poloz, Macklem’s predecessor, showed in a lecture at the University of Ottawa in 2016 that the combination of “easy” monetary policy and “tight” fiscal policy in the years that followed the Great Recession caused private debt to surge to record levels. The recovery was weak, but Stephen Harper’s Conservative government of the day was determined to reduce spending, so the Bank of Canada was forced to keep interest rates low to stave off deflation. More government spending would have contributed to economic growth, which would have allowed the Bank of Canada to get out of the lower-for-longer trap. And more spending might have let the central bank tighten the reins on runaway housing prices. 

“As for the desirability of one policy mix over another, hindsight is always 20/20 and such a discussion would have little meaning here,” Poloz said in the lecture. “We will refrain from the pros and cons of alternative policy mixes.”

Poloz, who was appointed by Harper’s finance minister, the late Jim Flaherty, would have crossed a line if he had passed judgment on the decisions of an elected government. But his lecture was an important articulation of what Martin had recognized in the mid-’90s—the beginning of a period that Poloz described as “neutral/neutral” fiscal and monetary policy. The decision to add that to the mandate allowed for a more sophisticated understanding of how the interplay between the Finance Department and the Bank of Canada should work. 

“Fiscal policy and monetary policy are two big levers when it comes to steering the Canadian economy,” Freeland said in 2021. “We’ve seen fiscal and monetary policy working together as this unprecedented global pandemic hit Canada. Fiscal and monetary policy are going to continue to need to work together as we get through this current stage of the economic recovery.” 

Fiscal and monetary policy aren’t working together at the moment. Macklem has said repeatedly in recent weeks that federal and provincial spending is on track to grow at a rate that will stoke inflation and force him to keep interest rates high. Governments in Ontario and British Columbia said this fall that deficits will be wider than forecast, suggesting Macklem will be getting little help from the provinces. 

That means Freeland will have an outsized role in the trajectory of interest rates. If she makes a concerted attempt to restrain spending growth, it will ease the Bank of Canada’s concerns about getting inflation all the way back to target. She also would strengthen the credibility of the monetary-policy mandate by living up to her end of the bargain. 

If those aren’t reasons enough to cut spending, there’s another way to think about it: Freeland could be more like Martin or more like Harper. Her choice. 

Kevin Carmichael is The Logic’s economics columnist and editor-at-large. He has spent more than two decades covering economics, business and finance for outlets including Bloomberg News, The Globe and Mail and the Financial Post, where he also served as editor-in-chief.