Okay, okay, we get it. For weeks, the Liberals have been signalling that a major shift in policy is in the works, starting with this month’s Speech from the Throne. Rather than the rapid increases in spending of their first years in government, or the truly massive increase in spending since the pandemic – at about $630-billion, it is nearly double what was forecast in the last budget – the government is planning … even more massive increases in spending.
Quite how massive we can only guess at as yet, but based on the rhetoric from the Prime Minister (“this is our moment to change the future”), his new Finance Minister (who aims to turn the pandemic into “a fabulous opportunity for the country”) and a phalanx of “senior government officials,” Justin Trudeau is betting the country’s future on a quite extraordinary burst of federal activism. There will be more money for daycare, more money for senior care, more money for unemployed workers and part-time workers and low-paid full-time workers, more money for green infrastructure, for industrial subsidies and anti-racism initiatives and, well, you get the idea.
And no one, the Prime Minister vows, will have to pay a dollar more in taxes for any of it: It will all be chalked up to the national debt. This year’s deficit, already pegged at about $380-billion (it grew by $37-billion in a single day last month, an amount that would once have attracted some notice) or 18 per cent of GDP, is only the start. The deficit looks likely to remain well in excess of $100-billion for several years, even in the most optimistic of scenarios. The federal debt is on track to exceed 60 per cent of GDP, with further increases beyond.
The assumption, once common, that the battery of emergency spending measures enacted in response to the pandemic – or rather, in response to the economic shutdown governments imposed after being caught napping by the pandemic – would quickly be unwound afterward now looks hopelessly naive. Some of it will be, but much of it is likely to be made permanent, while new programs will be added in place of those that expire.
Because, as those senior government officials never tire of reminding us, interest rates are at record lows. Ten-year bonds pay less than 1 per cent annually. Debt service charges are just 9 per cent of revenues, less than a quarter the ratio at their mid-1990s peak.
A prudent person might suppose that if rates are lower now than they have ever been, they are also lower than they are likely to be in future. But the basis of the government’s plan is that they will stay this low forever, or at least until the next election, which amounts to the same thing.
You understand. The federal government can issue hundreds of billions of dollars in new debt every year, at the same time as every other government on earth is doing the same, and it will have no impact on rates – not just now, in mid-crisis, with central banks still buying much of it, but for the foreseeable future. This amounts to the abolition of scarcity, or the notion, applicable for most of the past several millennia, that there is any limit to what governments can spend. The principle underpinning the government’s approach is not just that we can have something for nothing, but that we can have everything for nothing. No wonder they’re so excited.
The principle on which current deficits were originally justified – that government had an obligation to compensate people for depriving them of their livelihood for several months – has thus been replaced by another: that governments should “build back better,” or in other words, that they should seize the opportunity provided by this temporary emergency to make permanent changes to the social and economic fabric of the country.
This is not just unwise. It is not just reckless. It is a fundamental breach of faith. There was widespread public consent earlier this year to the proposal that the economy should be put into a coma, to prevent the spread of a deadly disease. It was not so the government could perform all sorts of experiments on it while it slept. Spending hundreds of billions of dollars in borrowed money to keep the lights on in the midst of a once-a-century pandemic made sense. Borrowing billions more to fulfill every Liberal dream, political or ideological, does not.
Even at these levels of spending, opportunity costs cannot be ignored altogether. Unless resources are literally infinite, governments still have an obligation to get the most bang for our buck. The money diverted into supporting the pet schemes of Liberal backbenchers or the empire-building ambitions of members of cabinet is money that cannot be used for the core purposes of government. And the money absorbed by government is money that is not available for private investment.
There is no precedent for what the government is planning. This is not the Second World War, the only comparable borrowing binge, which was shortly followed by years of federal surpluses. Neither is this the 1960s, the great period of government expansion, when federal revenues were growing at more than 11 per cent per annum. What is being contemplated, rather, is a major and permanent expansion in spending, all of it borrowed, at a time of historically slow economic growth, the product of sluggish private investment and the remorseless arithmetic of population aging – a trend that has been observable for the better part of the past two decades and is likely to last for decades more.
If the government were serious about “building back better,” it would be directing the bulk of its efforts to improving the economy’s long-term growth prospects. What it appears to have in mind instead is a slew of programs aimed mostly at redistributing wealth, rather than creating it; consumption, rather than investment. It may buy the Liberals a few months, or even a few years. But the costs will be counted for generations.
Keep your Opinions sharp and informed. Get the Opinion newsletter. Sign up today.