Trudeau’s Rift With Finance Chief Weighs on Virus Recovery Plan

After spending hundreds of billions to prevent a major depression, Justin Trudeau will make critical decisions in coming weeks on the next steps to support Canada’s economic recovery. That will include whether to keep or drop the only finance minister he has ever had.

The strains between Trudeau and Bill Morneau, the two most powerful men in the government, burst into public view this week. On Monday, Bloomberg News reported the prime minister has been taking advice on an economic recovery plan from Mark Carney, the former Bank of Canada and Bank of England governor who is known to have political ambitions. By Tuesday afternoon, Trudeau was forced to issue anextraordinary statement expressing “full confidence” in Morneau, to quiet the drumbeat of speculation about the minister’s future.

A face-to-face meeting between the two men is scheduled for Monday, according to a person familiar with their calendars who spoke on condition of anonymity.

Anethics scandal that has engrossed Trudeau’s government and implicates both men is hurting the relationship. But more consequential are differences of opinion on how C$240 billion ($181 billion) in emergency pandemic spending has been rolled out and how much more the state should spend to support the recovery from the Covid-19 pandemic.

For this account of how the relationship frayed, Bloomberg spoke to more than half a dozen people either directly involved with policy deliberations or with knowledge of how decisions were made.

Prime Minister’s Override

Multiple officials in Morneau’s finance department described how they were overruled in key debates — how their concerns about cost or lack of analysis were ignored and how they wound up on the losing end of many policy arguments.

On the other side is a prime minister’s office determined to get money out the door quickly, wary of delays from a public service that is hardwired to move slowly. Canada’s unemployment rate spiked as high as 13.7% amid virus-related lockdowns, leaving more than a quarter of Canada’s labor force without work or on reduced hours. It’s still 10.9%.

Trudeau’s communications director, Cameron Ahmad, and Morneau’s top spokesman, Pierre-Olivier Herbert, denied the relationship between the prime minister’s office and finance is tense or involves disagreements beyond what is typical.

To date, the government has unveiled nearly 70 different measures to cushion the economy from the shock of Covid-19. The prime minister announced most of them himself, at daily briefings outside his Ottawa residence he held during the height of the pandemic.

The largest Covid-19 program, a C$2,000 monthly payment to those who’ve lost jobs, was the invention of the finance department. Morneau argued for a less generous cash benefit, in part because he feared the possibility some recipients would be reluctant to return to work. The minister was also initially reluctant to increase wage subsidies for business until a thorough analysis was done — a position the prime minister’s office rejected.

The prime minister and finance minister also disagreed on how long to freeze employment insurance premiums, which are paid by workers and businesses to fund benefits for those out of work.

Read more: Canada Outpaces U.S., Recouping 55% of Jobs Lost to Pandemic

Carney’s sudden involvement caught Morneau by surprise, one insider said. It was an embarrassing development, given the finance minister has struggled at times to get Trudeau on the phone himself.

Officials close to Morneau also complained that the prime minister’s office cares too much about polling instead of economic analysis. Another official downplayed the tensions, but was dismayed by communication breakdowns between Trudeau’s office and the finance department.

People in the prime minister’s office say the assertions are inaccurate, citing how officials from the finance department and prime minister’s office spoke daily.

Now the question is how Trudeau will handle his most important cabinet post as his government prepares a new agenda for the fall. Some say that to set a new tone, Trudeau may have find someone new to take the lead on an economic recovery plan — Carney is one possibility, Deputy Prime Minister Chrystia Freeland is another. Others say they hope that trust will be restored between the Trudeau and Morneau as the stresses of crisis fighting begin to ease.

There’s broad consensus in the government that fiscal policy must be used to boost the economy until the public health scare dissipates, which could be years away. Everyone agrees money needs to be spent in shoring up the medical system and long-term care homes.

The big question is how ambitious Canada can afford to be. Advocates close to Trudeau are pushing for a transformational social and economic agenda and see Morneau has an obstacle. Too “orthodox,” is how one official close to the prime minister describes him.

Morneau often acts as a bulwark on economic and fiscal matters within what is probably Canada’s most left-leaning cabinet since Trudeau’s father ran the country in the early 1980s. Canada’s deficit, projected this year at C$343 billion, or 16% of economic output, will almost certainly exceed C$100 billion next year, even with no new measures.

Proponents of aggressive fiscal spending point out that the economics of deficits have changed dramatically since Pierre Trudeau’s day, with interest rates now at historic lows. Where the government lands on this will ultimately depend on who does a better job at convincing Trudeau.

Tensions between prime ministers and finance ministers are nothing new, and almost inevitably lead to the departure of the latter when they become untenable. Stephen Harper’s long-serving finance minister, Jim Flaherty, dropped out of cabinet in 2014 amid policy clashes. Tensions between Jean Chretien and his finance minister, Paul Martin, nearly tore the Liberal Party in half in the early 2000s.

One of the most egregious incidents of miscommunication took place in 1978 when Pierre Trudeau announced spending cuts without informing Chretien, his finance minister at the time. “That probably stands out in all Canadian history as the most extreme case,” said Don Drummond, former chief economist of the Toronto-Dominion Bank, who has also worked at senior positions at the finance department. Chretien survived that embarrassment and continued on the job.

Morneau’s problem is that he has few close allies within the Liberal caucus, which is full of MPs who owe their political careers to Trudeau. The primary concern for the prime minister, if he indeed wants a new finance chief, are the optics of a change in senior leadership in the middle of an economic crisis.

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