Despite doubling federal spending this year to about $650-billion, Finance Minister Chrystia Freeland is just getting started.
In her fall fiscal update, tabled Monday, Ms. Freeland announced plans to spend an additional $70-billion to $100-billion over three years on a postpandemic stimulus program – with the details to come later. This is on top of promised investments in a national child care program – no cost estimates for that, either – and provincial demands for more health care cash.
Never has a Canadian government spent so much, so fast, or so insouciantly.
While there is broad consensus across the political spectrum that investing in child care is the right move for both economic and social reasons, there is no agreement about whether a stimulus package would be either necessary or effective once the pandemic ends.
The promised stimulus, the details of which could be in the next federal budget, appears to be more of a political move by a minority Liberal government preparing for an election than sound policy based on the need for an injection of yet more public money in the economy.
There has, after all, been record amounts of public money doled out in recent months, much of which has ended up sitting in the savings accounts of thousands of Canadians who saw their incomes rise during the pandemic thanks to Ottawa’s largesse. Canadian businesses are also sitting on huge stockpiles of cash, waiting until the pandemic passes to invest it.
“Redeployment of that cash will have a notable impact on the future trajectory of consumer spending and the economy as a whole,” CIBC economists Benjamin Tal and Katherine Judge said in a Nov. 17 report that pegged the “excess cash” held by Canadians at $170-billion.
Rolling out stimulus spending at the same time consumers and businesses are reopening their wallets would serve no useful economic purpose. It will only add to a ballooning federal debt.
Ottawa will still need to come to the aid of individuals and businesses hardest hit by the pandemic for months to come. But it must begin to do so in a more targeted fashion than it has until now. The pandemic will permanently change the configuration of Canada’s economy and propping up businesses unable to adapt to this change could damage the recovery.
In her fiscal update, Ms. Freeland pointed to recent calls by the International Monetary Fund and Organization for Economic Co-operation and Development for governments to “maintain substantial fiscal support through the crisis and recovery phase, where they have space to do so, including by directly stimulating demand through public investment as a complement to transfer programs aimed at supporting household income.”
Those urgings of the IMF and OECD were not aimed primarily at Canada, which takes the crown when it comes to pandemic-related income supports and other aid measures.
The OECD, for instance, last month found that real household income per capita surged 11 per cent in Canada during the second quarter of 2020. Household income dropped in almost every other developed country outside the United States, plummeting 7.2 per cent in Italy, 3.4 per cent in Britain and 2.3 per cent in France.
For its part, the IMF has reported the combined deficits of Canada’s federal and provincial governments will exceed 20 per cent of the country’s gross domestic product in the 2020-21 fiscal year. The average for eurozone countries is 10.7 per cent. Against this backdrop, the need for additional stimulus here is debatable.
“As economies tentatively reopen, but uncertainty about the course of the pandemic remains, governments should ensure that fiscal support is not withdrawn too rapidly,” the IMF said in a blog post accompanying its October Fiscal Monitor report. “However, it should become more selective and avoid standing in the way of necessary sectoral reallocations as activity resumes”
Public investments in infrastructure should be evaluated based on their long-term economic merits, such as productivity-enhancing and decarbonization measures. Projects that are “shovel ready” often turn out to be a waste of public money.
That was the case after the 2008-09 recession, when the Conservative government of Stephen Harper introduced a $47-billion stimulus program that fell short of its stated goals. Politically motived pet projects got funded, to be sure. But a 2010 Fraser Institute review of the program found that “government spending on infrastructure had little to no effect on Canada’s economic growth during the recovery. Instead, the data demonstrated that private-sector investment and increased net exports were the drivers of economic recovery.”
That conclusion is now being hotly contested by none other than Ms. Freeland and the federal Liberals, who are planning a stimulus program twice the size of the Harper plan.
What could go wrong?
Even based on the most “optimistic” scenario outlined in Ms. Freeland’s fiscal update, federal spending will approach almost 30 per cent of GDP, far surpassing its previous peak of 24.9 per cent in 1982-83, based on fiscal tables going back to 1966. The best-case scenario sees federal spending falling back below 20 per cent next year, and to about 16 per cent (including interest costs) by 2024-25. The fiscal update provided no information about how this will be achieved.
Instead of dreaming up plans to spend more, Ms. Freeland needs to tell Canadians when and how she intends to spend less. Because that day is coming, whether she admits now it or not.
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