Prime Minister Justin Trudeau’s government has done a remarkably effective job in raising the austerity boogeyman to deflect attention from the truly frightening fact that it has lost control of the country’s finances. So effective that even the Conservatives are afraid to disagree.
“This is not the time for austerity,” the government insisted in its September Speech from the Throne, as if any government anywhere actually chooses to make brutal spending cuts rather than having them imposed on them by outside forces, such as a loss of investor confidence.
Some governments do choose fiscal restraint over profligacy, managing public finances in ways that preserve fiscal firepower for when its really needed, improve the tax competitiveness of their economies and ensure intergenerational equity. For all of its flaws, this was certainly the case with former prime minister Stephen Harper’s Conservative government.
The Harper government got tagged with the austerity label when it moved to wind down stimulus spending implemented during the 2009 recession and return to a balanced budget by 2015. But the fiscal retrenchment of the Harper years was mild by global standards and it was undertaken against the backdrop of an expanding economy. It was by no means austere.
If you want to know what austerity looks like, check out Greece. After years of spending beyond its means – and fudging the government’s true finances – Greece hit a debt wall a decade ago and needed twin bailouts from the European Union and International Monetary Fund. In exchange, it was forced by the EU and IMF to take a hacksaw to spending, resulting in real wage cuts for public-sector workers, reductions of as much as 40 per cent in public pensions and massive tax increases.
You can quibble with the Harper government’s specific cuts, but you cannot deny that it left the books in excellent shape for its successor. In 2015, the federal net debt-to gross domestic product ratio was on a downward slope and was projected to fall to 25.5 per cent by this year.
Mr. Trudeau’s Liberals trotted out the austerity boogeyman during the 2015 election campaign and promised to run modest deficits of $10-billion a year for three years. It provided a stark contrast to Mr. Harper’s Conservatives, portrayed as dispassionate number crunchers, and the New Democratic Party under Tom Mulcair, which went against type by vowing to keep the books balanced.
The Liberals ran deficits three times larger than promised, but pledged (in a non-binding sort of way) to maintain the debt-to-GDP ratio at around 31 per cent. It was only with the onset of the COVID-19 pandemic, and the spectacular increase in federal spending, that the fatal flaw in the Liberal promise was exposed. If they aimed merely to stabilize the ratio during good times, it necessarily followed that the ratio would rise in bad ones.
And these are very bad times, indeed. The government’s July fiscal snapshot projected the debt-to-GDP ratio would soar to 49.1 per cent by the end of the current fiscal year in March, from 31.1 per cent. Since then, Ottawa has undertaken more spending commitments, while the prospect of a double-dip recession has increased as the pandemic drags on.
Finance Minister Chrystia Freeland, who will table the government’s fall fiscal update on Monday, will once again dust off the austerity boogeyman to obscure the emperor’s nakedness. Just as she did in a speech last month, describing as “monstrous” the notion that government might abandon Canadians who “are suffering through no fault of their own.”
The problem with this narrative is that it belies basic facts. It is now clear that the spending measures rolled out in the spring to aid individuals and businesses vastly overshot their mark. A CIBC report last week noted that, while Canadian labour income fell by $100-billion during the second quarter of this year, government transfers grew by a hallucinatory $225-billion.
The result is that, in the aggregate, individuals and businesses are sitting on $170-billion in excess cash. While it is undeniable that thousands of Canadians are suffering, significant amounts of aid have gone to those who did not need it. It is the opposite of heartless – another word Ms. Freeland uses to describe her critics – to suggest that the government should have preserved some of its fiscal firepower for the long slog ahead.
On Monday, Ms. Freeland is expected to reveal a deficit well in excess of the $343-billion her predecessor Bill Morneau projected for the current fiscal year. Instead of adopting a fiscal anchor to prevent the federal debt ratio from spiralling ever higher, she is expected to recycle the Liberal line about future deficits being sustainable as long as interest rates remain lower than GDP growth. As if she or anyone could guarantee such a thing.
It is a reckless roll of the dice. You might even call it monstrous.
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