In the early days of the Covid-19 pandemic, as cases and the death toll mounted in Canada, Justin Trudeau and his finance minister, Bill Morneau, sought to assure nervous businesses and households the government had the tools to tackle the crisis.

Now, after racking up a projected C$343bn deficit to stabilise the economy, the acrimonious exit of Mr Morneau from cabinet has spawned a new level of uncertainty at a critical juncture in Canada’s recovery — one that has pitted Mr Trudeau’s ambitious plans for a post-pandemic stimulus barrage against the spectre of unending deficits.

“It’s unsettling and ominous,” said Bill Robson, chief executive of the CD Howe Institute, a policy think-tank. “We are in literally unprecedented territory when it comes to increases in spending and borrowing, and we are conspicuous now in Canada in having very high-level disagreement over the direction of economic policy.”

After a week of leaks emanating from the prime minister’s office steadily undermined Mr Morneau, he resigned as finance minister on Monday, insisting that he only ever intended to serve two terms in the job he has held since the Trudeau Liberals first won in 2015. The following day Mr Trudeau appointed his deputy prime minister, Chrystia Freeland, to the post.

While it is still unclear what transpired between Mr Trudeau and Mr Morneau, an ongoing ethics controversy — involving a contract awarded to Toronto-based WE Charity to administer a C$912m programme, which was cancelled after revelations that both politicians had family connections to the group — was certainly part of it.

The episode wiped out much of the goodwill Mr Trudeau earned for his early response to the pandemic. Meanwhile, the two men also clashed over the government’s pandemic spending, as well as Mr Trudeau’s proposal to pump additional money into green energy programmes to transform Canada’s economy.

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What exactly the Trudeau government has in mind by way of a stimulus plan is the stuff of speculation for now. This week the prime minister suspended parliament until September 23, when he intends to kick off a new session and present his government’s stimulus road map.

For hints of what is to come, some are looking to the work of the Task Force for a Resilient Recovery, an advocacy group formed in May by finance and academic experts and Gerald Butts, Mr Trudeau’s former principal secretary.

Its preliminary report last month proposed spending C$50bn over five years to construct and retrofit energy-efficient buildings, boost the adoption of electric vehicles and promote hydrogen technology, among other measures.

“Once we’ve dealt with the immediate health crisis we’re going to have to invest in an economic recovery anyway, so rather than invest in the economy of yesterday, we should invest in the economy of tomorrow,” said Stewart Elgie, a professor of law and economics at the University of Ottawa and a task force member. “That’s not just a green economy, it’s an economy that’s more digital, more innovative and more inclusive.”

Mr Trudeau’s stimulus plan will face intense scrutiny from the left and younger voters who demand more action. While Mr Trudeau has made tackling climate change a core part of his last two election campaigns, the government’s efforts before the pandemic had not put it on track to meet its goal of reducing emissions 30 per cent below 2005 levels by 2030.

Yet talk of greening the economy is already sparking unease in resource-rich provinces. In her previous job Ms Freeland was tasked with addressing a rising tide of western Canadian alienation that saw the Liberals wiped out in Alberta and Saskatchewan during last year’s election.

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This week, when questioned by reporters about “decarbonisation” initiatives in any future stimulus, Ms Freeland said: “of course, it has to be part of it. All Canadians understand that the restart of our economy needs to be green.”

Many are watching to see to what extent she provides a buffer to Mr Trudeau’s ambitions.

“She’s one of the good soldiers so she won’t fight back the way Morneau did, as limited as that was,” said Norman Levine, managing director of Toronto-based investment firm Portfolio Management Corporation and a critic of the Trudeau government. “What really bothers me is that there’s no sense of fiscal accountability or restraint or worrying about how this will affect future generations.”

Others are taking a wait-and-see approach. “She’s been very strong as a minister on all the big files she’s had so I hope she’ll see her role as restraining colleagues and making sure every dollar that goes out makes Canada a more competitive economy,” said Robert Asselin, a former policy adviser to Mr Morneau, now with the Business Council of Canada, a lobby group.

“We need a fiscal anchor that is credible so everyone will know the direction the federal government wants to go with fiscal policy.”

A lot may depend on the outcome of the US presidential election in November. A win by Democratic candidate Joe Biden, who has promised a stimulus plan modelled on the Green New Deal, would provide political cover for a similar big-ticket programme in Canada. Mr Freeland echoed Mr Biden’s “build back better” tagline in her first media appearance as finance minister.

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The clash over the future of Canada’s economy may eventually be put to voters, given the shaky minority status of the Trudeau Liberals. Opposition parties will get their first chance to bring down the government as early as next month, when parliament reconvenes.

Via Financial Times