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Deputy Prime Minister and Minister of Finance Chrystia Freeland tries on a pair of shoes from direct-to-consumer footwear company Maguire during a pre-budget photo op in her office in Ottawa on April 15.Justin Tang/The Canadian Press

John Rapley is an author and academic who divides his time among London, Johannesburg and Ottawa. His books include Why Empires Fall (Yale University Press, 2023) and Twilight of the Money Gods (Simon and Schuster, 2017).

This week’s federal budget probably won’t do much to address Canada’s deepening economic challenges, such as the housing crisis or the country’s poor productivity.

Like it or not, to do that would require spending, which is not nearly as sacrilegious as some paint it to be. And in that respect, by the standards of Canada’s peers, this budget couldn’t be called ambitious.

The federal fiscal deficit will come in somewhere between 1 per cent and 2 per cent of GDP, depending on the scenarios one uses. It’s a lot of money but compared with the U.S., whose fiscal deficit currently exceeds 6 per cent, it’s pretty modest. Even the prudent Germans exceed this while Britain, which has cut its budget so deeply that public services are collapsing, is running a deficit more than double Canada’s.

The domestic context is even more illuminating. The federal government will be spending more than $50-billion a year on debt servicing, or about 3 per cent of GDP. That, however, pales in comparison to the 15 per cent of their income Canadians are now spending servicing debts.

In his response to the Finance Minister’s presentation on Tuesday, Opposition Leader Pierre Poilievre, who still believes Ottawa is spending too much, claimed that federal deficits make the government richer and the people poorer.

Mr. Poilievre has a point – albeit not perhaps the one he intended. The reverse, a tightfisted, poor government and rich households, is indeed the case. We’ve seen it for years – and we’ve been drunk off it.

After the 2008 financial crisis passed, Canada ran a comparatively tight fiscal policy. Partly in consequence, the federal government’s net asset position has been declining for years, reflecting a lack of infrastructure spending. It’s now negative.

And now, with a poorer government, Canadian households are as rich as they’ve ever been. The government’s tight fiscal policy enabled the Bank of Canada to run a loose monetary policy, providing the ultra-low interest rates Canadians came to know. Central banks further justified their largesse on the grounds they needed to stimulate economies in the absence of fiscal expansion.

But the result was a run-up in mortgage debt, the end result being the housing bubble that now cripples the economy.

And therein lies a huge problem that this budget, whatever its stated intentions, scarcely addresses. The fact that most of Canada’s wealth is based on borrowed money that has been used to inflate property values, with Canada’s wealth mostly locked up in real estate, has saddled the economy with a huge deadweight. Not only does that real estate produce nothing, but the high debt-servicing costs limit the money left over for productive forms of investment.

Over the last decade, Canada’s GDP per capita income grew by a cumulative 4.2 per cent, virtually stagnating. But in that time, net household wealth more than doubled. In other words, wealth in Canada didn’t rise as a result of accumulated surpluses from output and incomes or the creation of new productive capacity. It resulted almost entirely from the inflation of property values by a combination of tight fiscal and loose monetary policies.

The end result is an economic model based largely on the transfer of income from workers to owners – in this case, owners of real estate, whether individual landlords or big institutional funds. In effect, Canada has become a rentier economy, in which the value of an asset is determined not by its underlying productivity but by its scarcity – which can be ensured with policies that limit new supply. In other words, policies to constrain growth.

The country could thus use some of what the Austrian economist Joseph Schumpeter called creative destruction, reallocating wealth away from unproductive to productive activities. One way of doing that would be with an ambitious program of home-building, accompanied by the required infrastructure to support it. This would be expensive. Not only would the government have to spend money building public housing and stimulating private construction, but it would need to make up the revenues municipalities lost from the sort of planning and tax reform that would reduce barriers to construction. But if it brought down house prices, it would not only give homebuyers a new leg up, it could in coming decades free trillions of dollars for other uses.

Perhaps the country would never go for it. It may be that Canadians, well-known for their instinctive caution, would be temperamentally disinclined toward the sort of expansive government programs that our partners, including our southern neighbours, are using to revive their economies. But it may also be that while our present economic model locks in stagnation, too many Canadians are now invested in it to want to change. After all, one person’s housing crisis is another person’s dividend stream.

And so Canadians may continue to focus on what are ultimately arbitrary targets, like a 1-per-cent fiscal deficit or a debt-to-GDP ratio, while ignoring the elephant in the living room. They say that in a democracy, you get the government you deserve. Economic policy discourse in Canada appears resigned to inertia. That may be what Canadians want.

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