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Note to readers: The Tax and Spend newsletter will end next week, as I move on to a new role at The Globe, as Editorials Editor. My deepest thanks to all of the thousands of Globe readers that subscribed to this weekly digest of fiscal intricacies and oddities. I learned a lot; I hope you did too.

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If you are speeding toward an intersection, what’s the best time to start jamming on the brakes?

Just as you’re pulling even with the stop sign, according to the flawed reasoning at the heart of the recent court decision striking down Ontario’s Bill 124, which capped wage increases for hundreds of thousands of unionized provincial civil servants in 2019.

There is complex jurisprudence on what constitutes a violation of the collective bargaining process, most of which is well beyond the scope of fiscal policy.

But there was one line of reasoning in the Nov. 29 judgement that does conspicuously intersect with fiscal matters. “Ontario has not, on my view of the evidence, demonstrated that the economic conditions in 2019 were of a sufficiently critical nature to warrant infringing on the constitutionally protected right to collective bargaining,” Ontario Superior Court Justice Markus Koehnen wrote. That was part of his analysis that concluded that there was no pressing and substantial need for the Ford government to short-circuit the collective bargaining process and impose a wage cap. (The province has indicated that it is likely to appeal that decision.)

Judge Koehnen then drew a contrast between Ontario’s fiscal situation in 2019 and that of the federal government in 2008, when Ottawa unilaterally rolled back wage settlements for some public service contracts, and imposed new terms. That move was ultimately upheld by the Supreme Court.

Seeking to distinguish the case before him from that precedent, Judge Koehnen wrote that Ottawa introduced its measures “… in the context of a worldwide financial crisis.” True enough – international credit markets seized up, auto companies had to be rescued, and the federal government incurred a massive deficit.

None of that came remotely close to threatening Ottawa’s long-term fiscal stability. As the trial judge in the 2008 case correctly noted, the wage cap and other measures that the Harper government pursued during and after the financial crisis were political choices. That’s not to say that they were good or bad choices – merely that those measures were not forced upon the federal government by outside forces.

Judge Koehnen implies otherwise in his ruling, and saying there was no financial crisis when Ontario passed Bill 124.

In other words, there was no need to jam on the brakes.

The judge’s analysis of the relative fiscal situations of the federal government in 2008 and Ontario in 2019 is exactly wrong. Ottawa enjoyed then, and continues to enjoy, a huge fiscal cushion. There was no threat to national financial stability in the wake of the financial crisis, even with the large deficits incurred for a couple of years. The Harper government made a choice to return to surplus relatively quickly.

By contrast, Ontario’s long-term outlook was dismal at the time Bill 124 was enacted. The federal Parliamentary Budget Officer concluded in September, 2018, that Ontario’s finances were not sustainable over the long term. Without remedial action, the province’s debt load would be larger than its economy by the end of the century.

That would be a crisis. Former Bank of Canada governor David Dodge provided that kind of analysis to the court. However, Justice Koehnen did not favour that testimony, preferring his own take on fiscal sustainability instead.

The judge’s analysis rejected aggressive government action (or at least the kind that impairs collective bargaining) in lieu of an immediate fiscal crisis. In other words – no need to slam on the brakes until you are skidding through the intersection.

Taxing questions

Joe Polito of Toronto wonders why the Bank of Canada bought federal government bonds on the secondary market, as part of its quantitative easing effort, rather than simply buying them directly from the government. To recap, quantitative easing aims to reduce borrowing costs for the economy (including government) when conventional decreases in benchmark interest rates have insufficient firepower.

The Bank of Canada’s website addresses the question in a roundabout way. The biggest difference is that purchases on the secondary market have a much smaller effect on money supply. It also avoids the perception that the bank is acting at the behest of the government – as would certainly be the case if the bank were simply buying newly issued bonds.

Beyond the question of optics, that kind of policy would also limit the bank’s intervention to the amount of new debt being issued. In other words, monetary policy would be controlled (or at least bounded) by fiscal policy. Instead, under QE, the bank’s purchases could be greater than new issuances of debt, including pre-existing bonds. Or, it could be smaller than fresh issuances. Either way, buying on the secondary market means the bank is able to make its own determination, separate from the actions of the Finance department.

Line Item

Pay raise: The Auditor-General’s report on pandemic benefits confirmed (in detail) what had been (in theory) clear for quite some time – emergency pandemic benefits were structured in such a way that some some workers received a substantial boost in income, making work less attractive. The AG report said that 44 per cent of job losses between February and April 2020 were among those who had pre-pandemic weekly earnings of $500 or less. However, only 11 per cent of people earning $500 or less returned to work between April and May, 2020, the report noted.

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