If there’s a carbon-tax recession coming, it’s news to the banks

ANALYSIS: Premier Doug Ford claims that a federal carbon tax could spark a recession — but, John Michael McGrath asks, where’s the evidence?
By John Michael McGrath - Published on January 22, 2019
Premier Doug Ford speaking at the Economic Club in Toronto
At the Economic Club of Canada on Monday, Premier Doug Ford warned that the federal carbon tax could trigger a recession. (Nathan Denette/CP)

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There’s a federal election coming up this year, and Justin Trudeau’s Liberals face a number of challengers: The NDP. The Tories. And… Doug Ford, who, for obvious reasons, isn’t actually in the running. But that’s not going to stop the premier from playing an active role in the campaign. This week, for example, he warned that a federal carbon tax could drive Ontario’s (or Canada’s?) economy into a recession.

“There are already economic warning signs on the horizon,” Ford told a group of one-percenters at the Economic Club of Canada on Monday. “I'm here today to ring the warning bell that the risk of a carbon tax recession is very, very real.”

Ford didn’t specify in his prepared remarks whether the recession would be concentrated in Ontario (the federal carbon tax won’t apply in provinces, such as Quebec or British Columbia, that already have a carbon price) or affect the whole country. He also didn’t explain how the federal carbon price would cause a recession when the cap-and-trade system his government ended didn’t.

TVO.org asked the premier’s office whether Ford could cite any economic authorities that backed up his claim.

“The Premier isn't the first person to raise serious concerns about the Trudeau government's carbon tax,” said Ivana Yelich, Ford’s press secretary, in an email. “The Conference Board of Canada released a report in 2017 saying that a federally-imposed carbon tax would shrink the Canadian economy by $ 3 billion.”

It’s true that the Conference Board report says that a carbon tax would have cost $3 billion in 2018. But the model’s projection was smaller for 2019 — $2.7 billion — and then smaller still in 2021 and after.

As one of the report’s authors put it bluntly on Twitter: “At no point in our research paper do we say that the carbon tax could cause a recession. We specifically describe the overall economic impact as ‘small.’”

The federal government, for its part, doesn’t deny that the federal carbon tax will have an economic cost. It estimates that the carbon tax will reduce economic growth by $2 billion between now and 2022.

But words are supposed to mean things. “Marginally slower growth” does not equal a “recession,” just as not being quite as rich as you’d like to be doesn’t make you poor. A recession is conventionally defined as two quarters of negative economic growth. As it happens, Ford made his prediction shortly after the Bank of Montreal released its economic forecast for 2019 and 2020 — the last of Canada’s big five banks to do so. Spoiler alert: not one of them predicts a recession in either year.

“We view Ontario’s economy in a relatively strong position going forward,” says Marc Desormeaux, provincial economist at Scotiabank. “The unemployment rate in Ontario is hovering around 5.5 per cent; that’s the lowest it’s been in two decades… Ontario is in a relatively good position economically going forward.”

All the big five banks (RBC, CIBC, TD, Scotiabank, and BMO) released their forecasts between December 12, 2018, and January 18, 2019, and while they vary in terms of the optimism of their outlooks, there is some consensus. All five big banks expect Ontario’s economic growth to exceed or match Canada’s economic growth in 2019. None of them predicts a recession in the next two years, though they do anticipate that Ontario’s growth will slow in 2020.

Desormeaux notes that Ontario’s economic position is second only to British Columbia’s — and B.C. has had a carbon tax much longer than Ontario. As of April 1, Ontario’s tax will be $20 per tonne of carbon dioxide emitted; B.C.’s is already $35 per tonne.

Economists can get their projections wrong, but these aren’t amateurs, and they’re not reading tea leaves or studying bird entrails. Desormeaux and his colleagues at other banks are well-compensated because their projections are considered valuable. And they can read the newspapers: their models take into account the possible impacts of a federal carbon tax. But none of them is projecting a recession; none of them is ascribing world-ending powers to the federal carbon tax.

This hasn’t been the only recent bad news for alarmists: earlier this month analysts at Navius Research found that the Saskatchewan government’s projection — that the tax would cause catastrophic economic harm — was riddled with errors.

Ford was correct about one thing: policymakers should be heeding certain economic warning signs.

“One situation we’re watching closely these days is trade tensions between China and the United States. The Ontario economy is closely linked to the U.S.,” Desormeaux notes. “To the extent that some of these trade tensions could translate into slower economic growth in the U.S., and therefore softer demand for Ontario exports, that’s a risk we’re watching closely.”

He adds, though, that the outlook will be rosier if the government can deliver on its promise to create more housing supply in the GTA.

However, Ford has now created a problem for his government that the public shouldn’t ignore. This spring, Minister of Finance Vic Fedeli is supposed to present a budget that will include the government’s official outlook for the next few years of economic growth and tax revenues. Either, as has happened in past years, the professional public service will present an estimate roughly in line with the big banks (putting the bureaucracy in the position of contradicting the Premier), or it will say something else. And, depending on what that something else is, it could raise questions about whether the government is browbeating civil servants into manufacturing the data the government wants — instead of gathering the facts the government needs.

Which is a serious quandary for the government to create for itself if all it wanted to do was own the Libs for a day.

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