First, the good news. The Finance Minister of Canada is not, contrary to rumours, an advocate of Modern Monetary Theory. Neither is she a disciple of Ayn Rand.
She does not believe the government can run “infinite” deficits without consequence. But neither does she believe it should “abandon” the businesses whose doors it has shut or the workers it has told to stay home, leaving them to bear the costs of their enforced inactivity themselves.
But as to what Chrystia Freeland is actually for, on that we remain scarcely more enlightened after her debut speech as Finance Minister than we were before – other than to say that she is very much in favour of maintaining the fiscal course the government is now on. Whatever that may be.
In her virtual address to the Toronto Global Forum, an annual conference of business and government bigwigs, Ms. Freeland offered a ringing defence of inaction, boldly rebranded as action. Having hoisted the deficit to somewhere in the $400-billion range, she pledged the government would do as little as possible, as slowly as possible, to bring it back down.
While the government’s current policy, she said, was “to do whatever it takes” (slang for “spend unlimited amounts”) to see Canadians through the public health crisis – a strategy she acknowledged was uncontroversial – it would not be so foolish as to spend any less than that after the crisis has passed. That would be to commit the grievous error of “premature fiscal tightening,” a policy she identified with the previous government, in the wake of the Great Recession of 2008-09.
Rather, she pledged “aggressive federal stimulus” until … until … well, not forever, if that’s what you’re thinking. “Our expansive fiscal approach cannot and will not be infinite,” she said. “It is limited and temporary.” Very well. How limited? How temporary? The minister remained sphinx-like, saying only that the torrent of federal spending – er, “targeted, carefully thought-out investment” – would continue, not just until the economy had come “roaring back” but until the recovery had proved to be “long-lasting, robust and equitable.”
Only then would the government “resume the long-standing, time-tested Canadian approach, with fiscal guardrails and fiscal anchors,” though what these would be we can as yet only guess at. Still, the overall message was clear: deficits in bad times, but also in good times. Spend while the “wolf is at the door” or the “rain is falling” or “we have been swept up in a tempest and forced to sail in uncharted waters” – we would appear to be suffering no deficit of metaphors – but also spend when wolf, rain and tempest are but distant memories. Fiscal anchors aweigh!
The arguments in defence were the familiar ones. We have less debt, relative to GDP, than some other countries. Interest rates are at historic lows. Monetary policy, interest rates being so low, is “running out of bullets,” putting the onus “squarely on fiscal policy” to support growth. And of course that old favourite, “this ain’t the 1990s,” a line that has been deployed in the service of fiscal profligacy since circa the 1990s.
“Not one of the factors that drove the fiscal crisis of the 1990s,” the minister averred, “holds true today.” Then, interest rates exceeded the growth rate in the economy, implying an ever-increasing debt-to-GDP ratio. Whereas now, “growth exceeds interest rates.” Voilà. No problem.
First problem: It isn’t just the interest rate on existing debt that matters for such calculations. It’s how much new debt you’re piling on: the primary or operating deficit – revenues less program spending. Interest costs may be at 100-year lows, but that’s not what’s driving the deficit; these days it’s 95 per cent primary.
Second problem: Interest rates aren’t going to stay this low forever – or possibly even for long. The only reason interest rates have remained so low, in the face of such massive government debt issuance, is because the Bank of Canada has been buying so much of it. The “fiscal” stimulus is mostly monetary; the chief contribution governments make by selling so many bonds is to give central banks something to buy.
Fully a third of outstanding federal bonds are now on the central bank’s balance sheet, a ratio that is forecast to exceed one-half by the end of next year. Increasingly, the bank is buying newly issued debt, meaning it is not just financing past spending but new spending as well. And while much of the debt it bought in the first months of the crisis was short-term, the bank has lately signalled a shift into longer-term bonds.
That means it can’t just wait until they mature to get them off its books. As the economy starts to pick up speed, it will have to find buyers for them. Either it does so in a timely fashion, pricing them to move in a buyer’s market – what with every other central bank doing the same – with consequent increases in real interest rates. Or it waits too long, inflation revives and bond-buyers demand an increased risk premium to cover it. Either way, the government’s debt costs can only go up.
Third problem: You know what else was a factor in the 1990s that isn’t now? Growth. A big part of the conquest of that era’s deficit was rapid growth in the economy – almost 4 per cent a year, in real terms, from 1994 through 1999, enough to produce a 35-per-cent increase in federal revenues. Today? Even before the pandemic, the economy was projected to grow at barely a third of that pace, about 1.4 per cent.
That has nothing to do with “austerity,” real or alleged. It’s a function of population aging, with the relative scarcity of workers it implies, and it’s going to be with us for decades. But while we’re on the subject, from 2010 through 2014, the dark period of “premature fiscal tightening” Ms. Freeland wishes us to avoid – spending having been reduced from its recession-high 15.9 per cent of GDP to 12.8 per cent – real growth averaged roughly 2.7 per cent per annum.
But then the Liberals were elected, and spending and deficits were released from their musty Harperian cages. Over the following 36 months, from fourth quarter 2015 to fourth quarter 2019, growth surged to … 2 per cent per annum. Come back austerity, all is forgiven!
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