HAMILTON, ONT. — As the Liberal cabinet met to plan a year’s worth of policy priorities for the country and signalled plans to spend on health care and the green transition, economists inside and outside the building warned there are still serious short-term risks ahead for the Canadian economy. 

Here’s the outlook from the ministerial retreat in Steeltown.

The view from inside cabinet: In last April’s budget, Finance Minister Chrystia Freeland said the government was keeping its “powder dry.” As she prepares for the next edition, she signalled she’s preparing to start using it. “Health and the need to invest in the green transition … are significant fiscal pressures,” she acknowledged, but issues that need addressing. 

Industry groups have called for the Liberal government to respond to the US$369-billion U.S. Inflation Reduction Act’s (IRA) clean-energy and -economy subsidies with swift and proportionate measures. The green transition “is a once-in-a-generation moment,” Freeland said. “Either Canada seizes that opportunity and seizes our share of the new industrial global economy which is being built or we get left behind.” 

“We still have fiscal room to be able to do the things we need to do,” insisted Associate Finance Minister Randy Boissonnault, although he acknowledged the impact of Canada’s financial commitments to Ukraine. The government will roll out “big-ticket items” like health-care spending and the IRA response “in a responsible way,” he said. 

The view from outside cabinet: Fallout from interest-rate hikes could continue for the first three quarters of the year, which points to more unemployment, said Carolyn Wilkins, former Bank of Canada senior deputy governor, speaking to reporters after delivering an economic briefing to cabinet.

“We need to ease off the pressures in the labour market,” said Wilkins, now a Princeton University senior research scholar and external member of the Bank of England’s financial policy committee. 

“Typically what that means is a little bit more unemployment. So far what I see in the forecast isn’t a massive increase in unemployment in Canada—it’s a lot worse in countries like the U.K.”

She said the economy is expected to slow significantly, but “the good news here, if there is any” is that companies could help ease labour-market pressure by closing open job vacancies.

The backdrop: On Monday, the Business Council of Canada (BCC) published a report co-authored by former Bank of Canada governor David Dodge warning that the Liberal government may be underestimating what it will have to spend to meet policy goals like greening the economy and increasing health-care payouts to the provinces. 

Factor in stubborn inflation, a possible recession and continued supply-chain challenges, and Canada’s debt-to-GDP ratio and prevailing interest rates could “exceed comfortable levels over the remainder of this decade,” wrote Dodge and Richard Dion, senior advisors at law firm Bennett Jones, and Robert Asselin, the BCC’s senior vice-president of policy. Asselin, who served as a policy and budget advisor to former finance minister Bill Morneau, has called for the government to present a more coherent industrial strategy.

Alongside Wilkins was federal chief statistician Anil Arora, and University of British Columbia economist Kevin Milligan, who previously advised Ottawa on its COVID-19 recovery plan. When picking and choosing industries to back, Milligan told The Logic afterward, “the focus of the government ought to be on things that grow our productive capacity.”

The Liberal spin in one line: “We’re the government, and we’ll keep doing good things,” Agriculture Minister Marie-Claude Bibeau told reporters Monday.