The most arresting chart in last year’s budget was the one showing projected economic growth rates in the member countries of the OECD over the next 40 years. In last place: Canada.
At last, we all thought: the Trudeau government had belatedly recognized Canada has a growth problem. Having fixated almost exclusively throughout its first seven years on redistributing income, perhaps it had now been persuaded of the importance of making some. True, Budget 2022 offered little in the way of new ideas to that end, but give it time. Rome wasn’t rethought in a day.
Well, here we are, a year later, and plainly the government has been doing a lot of hard thinking in the interim. Sadly, it has not been thinking about the economy. What most economists would prescribe for chronically slow growth is a mixture of smaller deficits, lower taxes and more competitive markets, less constrained by regulation or distorted by subsidies. What does this budget deliver? Bigger deficits, higher taxes, tighter regulation and oceans and oceans of subsidies.
The most alarming part is the deterioration in the government’s fiscal position. Less than five months ago, the Fall Economic Statement projected a deficit of $36-billion for the fiscal year just ended, falling steadily over the next five years; there was even supposed to be a small surplus in year five. That has now been replaced by deficits exceeding $40-billion over the next two years, with no return to balance in sight.
But balanced budgets, as we know, are not the government’s objective. Rather, its “fiscal anchor” is the more forgiving standard of a declining debt-to-GDP ratio: deficits small enough that the debt grows slower than the economy. But even that has now been set aside. It is now projected to rise this year, to 43 per cent, and to remain above 40 per cent for years after that.
What accounts for this? Not slower-than-expected economic growth. Revenues are off only slightly from the levels projected in the fall, and remain considerably higher than were projected last year at this time: more than $25-billion a year higher, on average, over the forecast period. The problem is, so is spending.
Spending soared over budget during the last fiscal year, in line with unexpectedly high revenues. But now that revenue projections have been dialled back, spending is to rise higher still.
The spending track in this year’s budget is fully $20-billion a year higher than it was just a year ago. Annual debt service costs over the same period are a further $8-billion higher than forecast, on average. Of course, these figures are almost certain to be revised upward again in future years. And all of it is borrowed money.
Where is that money going? A significant chunk of it – $3-billion, rising to $5-billion a year – is earmarked for higher transfers to the provinces, ostensibly for health care. Another $2- to $4-billion is for the new Canadian Dental Care Plan. These may (or may not) be worthwhile uses of federal funds. But they are consumption items, not investments. They should be paid for with current taxes, not higher borrowing.
The other big-ticket items in the budget: a suite of investment tax credits – subsidies, in other words – for industries and technologies the government favours, all of them given a “clean” prefix to signal their unassailability: clean electricity, clean hydrogen and clean technology. Mind you, the budget is at pains to reassure the reader that this is not a return to the bad old days of governments trying to “pick winners.”
“That approach did not work in the past,” it notes, correctly, “and is even less likely to work in today’s environment of rapid technological change.” But it turns out what this means is that the government will not attempt (for the most part) to pick winners when it comes to individual corporations. But picking whole industries or technologies is something of which it continues to believe itself capable.
The budget offers two broad justifications for this. One, the Americans are doing it, via the hilariously misnamed Inflation Reduction Act, so we have to to “keep pace.” And two, climate change: hastening the advent of a lower-carbon economy.
But keeping pace with the Americans does not mean our subsidies beat theirs: it just means both countries go on subsidizing their industries indefinitely, or until one of them runs out of money. (Hint: that will not be the U.S.)
And as for reducing carbon emissions: that was supposed to be what carbon pricing was for. Even before this budget, only a third of actual and planned emission reductions were to be achieved by carbon pricing. The rest was by the same old costly subsidy schemes carbon pricing was supposed to replace. And now we will get a bunch of new subsidy schemes on top of those.
Only now the subsidies will come with extra strings attached: to take full advantage of them, companies will have to pay “prevailing” (ie union) wages, meaning much of the subsidy will go, not to reducing emissions, but reimbursing labour. Again, whatever your view of this: is this something governments should be going into debt to finance?
There’s more in that vein. Higher corporate taxes. A ban on replacement workers. A new policy demanding “reciprocity” from other countries in government procurement. Ah well. The growth agenda was nice while it lasted.