Andrew Coyne is a Globe and Mail columnist.
The maxim in politics is usually “underpromise and overdeliver.” Not so for the Liberals’ next budget, their first in (ahem) more than two years. In the meantime we have had a “fiscal snapshot,” a Speech from the Throne and a fall economic statement, each helping to build expectations for the budget, if only by dint of their own surpassing vagueness.
But now it is nearly upon us, already appraised by the Finance Minister herself as “the most significant [budget] of our lifetimes.” A lifetime ago, budgets were simple statements of the government’s fiscal position, together with a rough outline of its spending and revenue plans for the year. In time they mushroomed into broader presentations of the government’s overall economic agenda.
But it is clear the Liberals intend this budget to be something else again, a transformative document that will not only “reimagine economic systems,” as the Prime Minister has it, but redefine the relationship between government and society, seizing the “opportunity” (the Prime Minister, again, but also the Finance Minister) of the COVID-19 pandemic to expand the size and scope of government, radically and permanently – and, not incidentally, kick off the Liberals’ re-election campaign.
The economy, as such, has become something of an afterthought. The Finance Minister may still talk of the need for $70-billion to $100-billion more in “stimulus” spending, but no one who has been paying any attention to the state of the economy would say the same. Growth surged to an annualized rate of nearly 10 per cent in the fourth quarter of last year, with a very-nearly-as-torrid pace expected for the first quarter of 2021.
Unemployment has fallen to 7.5 per cent, a decline of more than six points in seven months. Consumer confidence is at a three-year high. As the Parliamentary Budget Office noted in its recent report, with both real GDP and employment forecast to regain their precrisis levels later this year, “the size and timing of [stimulus] may be miscalibrated.”
Is that a backhanded compliment, a tribute to the stimulative impact of the more than $270-billion the government has already splashed out on pandemic relief? Only partly.
For the most part, last year’s unprecedented decline in output had little to do with any sudden deficiency of demand and much to do with constraints on supply, owing to both the pandemic itself and the lockdowns governments imposed in response. But as businesses and workers adapted to this dystopian new world, production snapped back remarkably.
Much of the money the government rushed into consumers’ hands was saved, not spent: Household savings spiked to nearly 28 per cent of income in the second quarter of last year, 10 times their average rate in recent years, and remain at historically high levels.
But much of that money was a windfall gain: The government gave out roughly $100-billion more than what was required to keep Canadians whole. With little opportunity to spend it, they salted away virtually the entire $100-billion in their bank accounts.
Whatever stimulative effect the remainder may have had depended heavily on its having been effectively financed by the Bank of Canada, via its massive ($5-billion a week, nearly $250-billion in all) program of government bond purchases, a.k.a. “quantitative easing.”
Had the government instead been forced to borrow the whole of fiscal 2020-21′s near-$400-billion deficit from the capital markets, unaided, it would have run into the usual headwinds that, in a small open economy such as ours, typically cancel out most if not all of deficit spending’s presumed stimulative effect: higher interest rates, if borrowed from the relatively limited supply of domestic capital, or a deteriorating trade balance, if borrowed abroad (as foreigners can only lend us the dollars they earn from us on trade).
With the Bank of Canada signalling it will throttle back its bond purchases in future, further stimulus would likely prove as ineffective as it was unnecessary. Or if instead the central bank were to agree to add still more tens of billions of dollars to its balance sheet, just as consumer spending surged (all those unintended household savings, rebranded by the government as “preloaded stimulus”) and the economy began testing the limits of its capacity – well, there’s a reason bond markets have been getting nervous of late. Interest rates have begun to rise, in Canada as elsewhere, not in spite of the central banks’ efforts, but because of them – because prospective bond buyers worry that inflation is reviving, and demand to be compensated for this risk.
You recall this was not supposed to happen. The fall economic statement went to great lengths to reassure Canadians that the unprecedented peacetime explosion of borrowing was easily manageable, thanks to “historically low interest rates” that would be with us for years. But interest rates are already twice what they were, and headed higher.
Moreover, the statement did not make allowance for much of the spending the government has already announced – not only the “stimulus,” but a raft of additional commitments on everything from a universal national child care program, to universal national pharmacare, to a reformed Fiscal Stabilization Program.
All told, the C.D. Howe Institute, in an unusually gloomy “Shadow Budget,” projects the federal debt, far from the gradual decline relative to GDP forecast in the fall economic statement, is likely to rise, first slowly then rapidly, cresting at 60 per cent of GDP by the end of the decade and climbing to more than 66 per cent in the decade after that. Older readers will recall that was the level the federal debt reached at the height of the mid-1990s debt crisis.
So we are in a bit of pickle – partly because of the pandemic itself, partly because of the government’s (forgivably) overeager response to it, partly because (less forgivably) it seems bent on converting much of that short-term emergency spending into longer-term discretionary spending, but mostly because its leading figures seem so blithely unconcerned about any of it.
The government’s plan for repairing the country’s finances, it would appear, amounts to hoping that interest rates stay low. It has to date offered no plan to balance the budget, still less one aimed at improving Canada’s long-run fiscal prospects.
What it has offered is a vision – a vision of a beneficent government that “has your back,” omnipresent and infinitely caring, under the all-embracing slogan of “Build Back Better.”
It is a potent vision, politically, inasmuch as the benefits are visible in the here and now, while the costs will not be apparent until the hereafter – after we are all dead or after the next election, as the case may be. But it is a no less fatuous one, for all that.
What, to begin, does “Build Back Better” mean? Build back from what? The concept, if not the phrase, has its origins in Japan, as a principle to be observed in rebuilding after earthquakes and similar disasters. The point is to build more resilient new infrastructure in place of the old, in order that the next quake might be less catastrophic than the last.
But the pandemic, as harsh as its effects on population health and the economy have been, has entailed no comparable destruction to the country’s infrastructure or productive potential. The economy, as mentioned, has already bounced most of the way back. The “she-cession,” in particular – a recession whose impact, unlike most recessions, fell more heavily on women than men – to the extent it was ever really a thing, is largely a thing of the past.
The best the government can do, in the absence of fresh disasters, to justify its “Build Back Better” rhetoric is to refer to all the problems, real or alleged, that the pandemic has “laid bare” or at least “reminded us” of: i.e. problems that long predate the pandemic, as do the Liberals’ proposed solutions to them. Take pharmacare: The pandemic did not suddenly make the case for replacing the private drug plans on which millions of Canadians rely with a universal public plan, as opposed to more modest reforms aimed at filling gaps in coverage.
Indeed, the most lasting impact of the pandemic may prove to be the vast crater it has left in our public finances: the deficit soaring to nearly 18 per cent of GDP in one year, the national debt doubling in four. The only previous episode to compare it with is the Second World War. But that was followed by several decades of very high economic growth, the revenue from which enabled the government not only to retire its wartime debt but, by the 1960s, to take on new responsibilities, in the form of a modern welfare state.
Nothing like the same applies in the present case. In the 30 years after the war, real economic growth averaged about 5 per cent a year. Over the next 30 years from now, it is projected to be roughly a third of that. The reason: population aging. Growth in recent decades has been fuelled less by increases in productivity – more output per worker – than by additions to the labour force: more workers. With the enormous cohort of baby boomers passing into retirement and beyond, that’s not going to be possible in future.
And the feds, of course, are only the half of it. As dire as the federal government’s finances are, the provinces’ are much worse. Many of them were struggling even before the pandemic. Now add in the relentless rise in the costs of health care – population aging, again – and the combined federal-provincial debt could exceed 100 per cent of GDP before long.
We are told not to worry because the rate of interest on the debt is currently lower than the rate of growth in the economy. But with interest rates already rising, growth is about to revert to its long-term trend. The day is not far off when the arithmetic will turn against us.
Let us suppose, just for the moment, that there were an opposition party that was even faintly troubled by any of this; let us suppose, even more outlandlishly, that it was prepared to do something about it. It will not be enough for that unnamed party merely to say no to Liberal spending schemes: The Liberals are itching to spend the next election campaigning against “austerity.” It will need, rather, to present an alternative vision, as compelling in its own way – or at least, compelling enough.
Yes, the budget must be balanced, the debt brought to heel, and no it wouldn’t be as hard as all that. The C.D. Howe report makes a persuasive case that the deficit can be cut to zero in five years, largely on the strength of two measures: avoiding big new spending programs and raising the GST by two points. That’s hardly austerity.
It is, however, political suicide, or at any rate a dubious investment of political capital. We could balance the budget tomorrow, and we would still be facing the same remorseless arithmetic of debt – not only the debt already accumulated but the debts to come.
It is, of course, not the debt as such that matters, but the relative burden it represents: the debt in proportion to GDP. Governments have some ability to shrink the numerator in that ratio, the federal government more so than the provinces. But they can achieve as much or more, at considerably less political risk, by expanding the denominator.
That’s where growth comes in: growth not in the sense politicians usually mean it – something to be ginned up on the quick with a round of stimulus – but sustained growth in the economy’s long-run productive capacity, the kind built on high rates of investment and steady annual increases in productivity.
At the moment we have neither. Investment in Canada is chronically low relative to other countries; productivity growth is anemic, and has been for years. Yet growth remains far from the centre of our political debate. So far as the Liberals even think about it – raising incomes, that is, as opposed to redistributing them – they have tended to rely on the same stale mishmash of policies: a mix of subsidies for R&D, heavy spending on “infrastructure” and centralized decisions about which industries, firms and technologies to support, of which the industry “superclusters” program is the most cloying example. As for the Conservatives, well, who knows what their alternative is?
It’s time to blow the lid off this debate. The crisis in public finance presents an “opportunity” of its own — the urgency of the situation is sufficient to alter the usual political calculus. If all the opposition does is offer more of the same, it will be recognized for what it is: a dodge, a way of avoiding talking about the deficit. But a serious pro-growth program, with all of the sweeping policy changes it would require, would be a political risk worth taking.
Broadly speaking, productivity in this country is held back by two things: barriers to investment and barriers to competition. Of the first, barriers to investment, taxes remain by far the most critical. Yet efforts at reform have tended to be piecemeal and incremental, cutting corporate tax rates while leaving personal rates, at least among those most likely to make investments, unchanged.
Perhaps the moment has arrived, 30 years after the last major tax reform, to think bigger. At the very least, we could broaden the tax base, eliminating many of the hundreds of special tax preferences and exemptions, known as “tax expenditures,” that litter the tax code and applying the revenues to cutting rates.
More radically, we could adopt the recommendation of many economists and abolish the corporate income tax altogether. Corporations, after all, do not ultimately pay the tax, but pass it on, some to shareholders, in lower returns, some to consumers, in higher prices, but most of it, as recent research suggests, to their employees, in lower pay. If so it would be not only more efficient but more fair to tax corporate earnings at the personal level, after they are distributed to individuals. Corporations could be taxed, not on income, but on cash flow: The stimulative effect of allowing a business to fully deduct an investment up front, rather than over the life of the investment, would likely dwarf that of cutting a few points off corporate income tax rates.
That leaves removing barriers to competition. There is a voluminous literature on the importance of competition in spurring innovation and productivity growth. As the Council of Canadian Academies noted in its landmark 2009 report, Innovation and Business Strategy: Why Canada Falls Short: “Competition is among the most potent incentives for innovation, both because of the benefits innovation can provide in terms of greater market success and the threats that can be averted if innovation keeps a firm running ahead of its competitors.”
What would that mean, in practice? It would mean opening up those parts of our economy that remain effectively closed to foreign competition, whether directly, as by the elaborate system of tariffs and quotas that protect certain agricultural industries under the rubric of “supply management,” or by way of restrictions on foreign investment, as in the airline, telecommunications and financial services sectors.
It would mean getting serious about removing the hundreds of remaining barriers to interprovincial trade, 150-odd years after Confederation and 26 years after the first federal-provincial Agreement on Internal Trade. Conventional wisdom for some time held that the gains from internal trade liberalization were comparatively small. Recent research has overturned this: Estimates now suggest it would result in a permanent increase in GDP of as much as 3.8 per cent – $2,000 per capita, in current dollars, every year, forever.
It would also mean de-subsidizing the economy – subsidies to business dull competition much as other barriers to trade do, and distort investment decisions in the same way as special tax breaks. A bonfire of the subsidies would not only greatly improve the workings of the economy, but also save taxpayers a fortune – $30-billion annually, by one recent estimate, half of it federal – especially if it extended to the many subsidies, explicit or implicit, available to Crown corporations: the Business Development Bank, the Export Development Corporation, Via Rail, Canada Post, the CBC and the rest.
It should also extend to investments in infrastructure, about which the budget will likely have much to say. Much has been made of the idea that spending on infrastructure is unlike other spending, in as much as it pays dividends, in the form of higher productivity and presumably higher tax revenues, lasting well into the future. It’s an investment, in other words, meaning it should be financed not only with public money, but borrowed public money. If future generations benefit from it, so the argument runs, future generations should help pay for it.
The force of the argument has been somewhat attenuated by the government’s habit of slapping the “infrastructure” label on everything under the sun, much as it has taken to calling all spending investment (or stimulus). But we needn’t get too metaphysical about it. The question to ask is not “is this investment,” but is it more like investment than other things?
Maybe every kind of spending pays some sort of long-run return, however small or hard to observe. But some presumably pay higher returns, more easily measured. In a world of scarce resources – which, notwithstanding the deficit, is still the world we live in – those are the projects to invest in.
What’s a good way to measure the return from an investment in infrastructure? Charge people to use it, and see what they’ll pay. As Tiff Macklem, now Governor of the Bank of Canada but then dean of the Rotman School of Management, wrote in 2018, “when businesses and households value the service provided by the infrastructure, they should be willing to pay for the service through freight, electricity, broadband, water rates, transit fares and road tolls. These revenue streams provide a ready litmus test of the economic value of the project.”
That was the idea behind the Canada Infrastructure Bank, which hoped to use those potentially lucrative revenue streams, supplemented by tens of billions of dollars in federal money, to lure private capital into funding infrastructure projects. But if you can charge people to use it, then there’s no need to put taxpayers’ funds at risk. Private capital will be willing to make the investment all on its own, leaving scarce tax dollars to fund things that can only be funded through taxes: pure public goods, such as defence, the kind of thing you can’t charge for.
So a final pro-growth idea would be to make the Canada Infrastructure Bank what it was originally intended, or at least presented, to be: a truly arm’s-length, truly market-oriented instrument for harnessing private capital in support of public infrastructure projects.
A pro-growth plan isn’t everything. But it can be the foundation of a broader answer to the Liberals’ spend-everything-now approach, one that might resonate a little better with the public than “we can’t afford it.” Call it small-government activism. It addresses itself to contemporary issues, but in a way that harnesses both state and market, each in the way most appropriate to its particular strengths.
The Liberals have made carbon pricing a central part of their approach to fighting climate change, for instance, on the grounds that it is the most efficient, least intrusive way of reducing emissions: a classic use of private markets to achieve public policy goals. Yet they insist on spending tens of billions more on the same failed subsidy and regulatory programs to which carbon pricing is supposed to be the alternative. An adroit opposition would use the logic of the Liberals’ position against them, making carbon pricing a replacement for, rather than a supplement to, existing programs.
It is probably futile, likewise to oppose spending more on child care, another likely budget centrepiece. But it is possible to propose a better model for delivering it. Given that child care is provincial turf, the Liberals will likely propose an increased transfer to the provinces, to be doled out to the operators of licensed, non-profit, probably unionized child-care centres. But this runs into the same objection as ever: The money only benefits parents who place their children in this particular type of care, and at those particular centres. A transfer sent directly to parents, perhaps by converting the existing child-care deduction into a refundable credit, would better respect parental choices, as well as provincial autonomy.
The broader agenda is to restrict the state to writing cheques rather than running programs, redistributing rather than regulating. That may not be the sort of conservatism that gets right-wingers’ blood pumping, but it’s one that, in this age of apparent abundance, has some chance of getting a hearing.
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