By now, governments are daring to talk about options for an exit strategy from the lockdown. In the most hopeful scenarios, some people in some sectors in some provinces may be permitted to return to work at some point, depending on the availability of tests that do not now exist on a scale that has never been approached – until the pandemic spikes again and we are all ordered back into our homes.
This is to be repeated until the advent of a vaccine that may or may not ever be developed, or until enough of us fall ill that “herd immunity” is reached. But enough of us aren’t going to fall ill as long as the lockdown continues, and if we did we might find it did no good: We still don’t actually know whether survivors acquire immunity, or if so, which ones.
So this is is not going to be easy, or quick. Even if we do succeed in gradually easing the restrictions that have strangled the economy, the economy is not going to suddenly roar back to life. Until they are sure they are safe, people will be slow to return to their normal routines, and they will not be sure they are safe for some time. How much time? Nobody knows.
Which means we have not yet begun to count the costs of the pandemic, or of the things we have done to protect ourselves from it, or especially of the things we have done to protect the economy from the things we have done to protect ourselves: the massive outlays of public spending, and equally massive issuance of public debt, and the almost equally massive purchases of that debt by the Bank of Canada.
However massive these figures may seem now (federal emergency spending programs are now projected to cost a total of $146-billion, to which add the cost of their provincial equivalents), they are almost certain to grow, since all of these programs were installed in the belief that the economy would only need to be kept on life-support for a few months – that the pandemic, and the lockdown, would be relatively brief, after which the economy would revive and the support measures could all be wound down.
But what if the crisis lasts longer than expected? The longer the economy remains depressed, the greater the costs, not only of all those existing programs but of the additional measures that will be needed to deal with the depression’s compounding effects – more defaults by borrowers, more strains on private lenders, more debt to be taken onto the public books.
Still, a day will come when the crisis has passed, the economy has begun to mend, and it becomes possible to return public finances to something resembling normal principles. Will it happen even then? This is the most worrisome part of the whole piece. It was entirely right and proper for the government, and the central bank, to take on such extraordinary amounts of debt, given the depths of the crisis: Businesses had to be kept viable, people had to be kept alive. But it is equally right and proper that, once the emergency has ended, so should the emergency spending.
It will take years to dig ourselves out of the debt we have already incurred. The federal deficit this year is likely to be well in excess of $200-billion, or more than 10 per cent of GDP. The federal debt, assuming a drop in national output in the range of 10 per cent, will almost certainly jump to 45 per cent of GDP or more, from 30 per cent last year. (Again, add provincial borrowing to this to get a truer picture of the country’s finances.)
But that’s just this year. So long as the debt is growing faster than the economy, the debt-to-GDP ratio will continue to mount. This year’s deficit will swell the debt by nearly a third, but even if the rate of growth were to slow to 10 per cent next year and 9 per cent the year after that – meaning deficits of roughly $100-billion in each year – we would soon be looking at a debt-to-GDP ratio of 50 per cent, and climbing.
What would it take to achieve even that level of discipline? It would require not only that the economy resume growing at a faster rate than we have been accustomed – say 6 per cent a year, in nominal terms – but that spending was immediately returned to something approaching precrisis levels: that having leapt from 15 per cent of GDP last year to 24 per cent or 25 per cent this year, it was slashed all the way back to, say, 17 per cent next year.
Is that likely? It will not have escaped the government’s attention that, as its spending has grown, so has its popularity: The Liberals lead the Conservatives by 13 percentage points in the latest Leger poll. Will it wish to put all of this new-found public gratitude at risk, with virtually every person and every business in the country now in receipt of some form of federal support, by taking it away from them?
Certainly the NDP, the Bloc and the Greens will not be clamouring for them to do so. But will the Conservatives be any more willing to get offside with the consensus, or their own supporters? Won’t businesses, in particular, find that the 75-per-cent wage subsidy to which they are now entitled is not just a stopgap to keep them from laying off workers in a crisis, but essential to their continued employment after?
Will the Bank of Canada, having agreed to get into the business of funding federal and provincial deficits, be so quick to cut them off? For that matter, how will it dispose of the hundreds of billions of dollars in government bonds it has already added to its balance sheet – as it must, if all that extra money is not to set off inflation as the economy begins to revive?
It’s all very well to talk about an exit strategy from the lockdown, in other words. But at some point the government will need a strategy to exit from the economy.
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