Senate Testimony on the Canadian Economic Outlook

Thank you very much, Senators, for the opportunity to meet and share my views on Canada’s economic and fiscal situation as you discuss issues related to the federal budget.

The Centre for Future Work is a labour economics research institute, founded in Canada in 2020. We conduct research on the full range of economic issues facing working people: including the future of jobs, wages and income distribution, skills and training, sector and industry policies, globalization, the role of government, public services, and more. The Centre also develops timely and practical policy proposals to help make the world of work better for working people and their families.  The Centre is independent and non-partisan.

Today I will present short comments on three economic issues of relevance to implementation of measures announced in the spring fiscal update, and related processes:

Diversifying Trade, Composition as Well as Destination: Donald Trump’s tariff policies and other trade attacks have posed a historic threat to Canada’s export industries. Most vulnerable are the higher-tech value-added industries that have been deliberately targeted by his Section 232 sectoral tariffs: including auto, steel, aluminum, and forestry. Further sectoral tariffs are possible given other investigations he has launched, including on aerospace, industrial machinery, semiconductors, and pharmaceuticals. Diversifying the end destination of our exports is a logical response to this challenge, and the federal government has pursued several opportunities in this regard. But there is another, equally important priority that must also be kept in mind as we traverse this challenge: diversifying the composition of our exports. In other words, what we sell is just as important as where we sell it. Canada has had some initial success in growing exports to other markets. By the fourth quarter of 2025, only two-thirds of our merchandise exports were to the U.S., down from three-quarters only a few years ago. That progress is fragile, however, dependent on cyclically high prices for gold, oil, and some other resource projects. At the same time, Canada’s dependence on exports of unprocessed or barely processed resource products – or ‘staples’, as they are often known in Canadian economic history – has been growing. Basic resources accounted for half of Canada’s merchandise exports last year, up from one-fifth at the turn of the century. Revering to a pure resource supplier – a ‘hewer of wood, drawer of water’ in the classic phrase – will not protect Canada’s economic sovereignty. We must preserve the capability to produce a full range of goods and services, including higher-technology value-added products. This goal should be front and centre in Canada’s emerging industrial policy strategy for responding to the threat from the U.S.

Sovereign Wealth and the Public Interest: Concurrent with the spring fiscal update, Prime Minister Carney recently announced his government’s intention to create a new sovereign wealth fund, that would invest in various projects with the intent of stimulating desired new economic activity, strengthening the structure of Canada’s economy, and accumulating public wealth over time. This is an interesting proposal with both opportunities and risks. Successful examples of sovereign wealth funds exist around the world. In general, the goal is not solely to accumulate and invest budgetary surpluses; most sovereign funds have a mandate to wield public capital in the interests of economic diversification or the qualitative development of the domestic economy. On that score, the fact that Canada’s fund is likely to be initially endowed with borrowed funds (rather than accumulated budget surpluses, which do not exist right now at the federal level) is not the critical issue. However, it will be important to correctly specify the mandate and governance structure of the new fund. In my judgment, the goal should be to foster investment and growth in strategic value-added industries that add to the breadth of capabilities of the Canadian economy, and help to address the composition challenge I mentioned above. I am worried by Mr. Carney’s reference to ‘asset recycling’ in his initial discussion of the idea, through which the government would potentially sell of existing public assets (reportedly including airports and ports) in order to subsidize other projects. This is a dangerous model that risks undermining the public interest in continued ownership of those vital assets. The goal is not to ‘recycle’ public wealth, but to build it over time (and enhance our economic capacities in so doing), and the new sovereign fund should be structured and managed with those public interests as its top priority.

The Latest Oil Price Shock: An already uncertain macroeconomic environment has been further disrupted by Donald Trump’s attack on Iran, the resulting closure of the Strait of Hormuz, and a global shock in oil prices. This will have negative effects on Canada, even though we are a major net exporter of oil and import virtually no oil from the Persian Gulf. Our Centre recently published a report estimating the impact of this oil shock on consumer costs and future inflation, based in part on the documented experience of the last oil shock (in 2022, after the Russian invasion of Ukraine). We considered three broad scenarios: one in which the Strait reopens immediately, one in which it remains closed for three more months, and one in which it remains closed for six more months. In any of these cases, supply disruptions and high prices will last for months after the Strait reopens, due to delays in loading and transporting shipments from the Persian Gulf, damage to export infrastructure from the war, and lasting shifts in expectations and risk premiums built into world prices. Even with immediate reopening, Canadian consumers would pay an additional $50 billion in direct and indirect costs over a 12-month period starting with the outbreak of the war at the end of February. The inflation rate would rise above 4 percent. If the Strait remains closed for longer, those costs escalate, and inflation could rise to 6 percent or higher. In turn, that will lead to higher interest rates and slower growth – on top of the existing weakness in Canada’s economy from the trade war. This disruption is the last thing Canada needs right now, and in my view it highlights important policy considerations. Having core energy prices in Canada set on the basis of volatile fluctuations in global futures markets, with no connection to Canadian production, supply, and demand conditions, exposes us to unnecessary risks. We should have a conversation in Canada about other ways to manage petroleum prices (noting that we already regulate electricity prices and gas distribution charges, which have remained stable despite the global oil chaos), and other ways to manage inflation (rather than relying solely on across-the-board interest rate hikes to suppress inflation of any kind, no matter its cause). I would also support fiscal measures to redistribute some of the record revenues that are now flowing to the petroleum industry as a result of this latest price shock – and which partly reflect excess costs paid by Canadian consumers. An excess profit tax, modeled on the one applied to Canadian banks and insurance companies during the pandemic, could recapture some of that revenue windfall, and use it to finance rebates to Canadian consumers and investments in renewable energy infrastructure (which are ultimately the best way to disengage from the volatility of world oil fluctuations). Bill C-30 includes measures to reduce federal excise taxes on gasoline and diesel in response to this price shock; asking the petroleum industry to contribute to the cost of that relief seems both fair and efficient. The full report which I reference, titled ‘A Sequel We Don’t Want: What the 2026 Oil Price Shock Will Cost Canadians,’ is available at www.centreforfuturework.ca.

Thank you again for your attention, and I look forward to any questions or discussion.