There are deficits, and then there are deficits.
Some deficits, such as the one the federal government is currently running, are about short-term stimulus. They’re about reviving an economy in recession. As people and businesses pull back, government steps in and leans in the opposite direction. That’s what Ottawa has done over the past six months – first spending to allow people to stay home, and then to stimulate the economy back to health.
That kind of deficit spending has two key attributes: It is necessary, and it is temporary.
Reasonable people can quibble over precisely how much the Trudeau government should be spending on stimulus, and where. But across the political spectrum, there’s no disagreement on the broad strokes of what Ottawa had to do. Canada ran a deficit to put money in the hands of millions of jobless Canadians. Such spending was a lifeline, and it can be gradually scaled back – as is already happening – to the degree that business activity returns, and employment rises.
The fiscal fallout from this necessary deficit – a debt-to-GDP ratio that this year will jump from 31 per cent to nearly 50 per cent – is manageable. Part of the reason it’s manageable is because, though the spending surge is big, it’s also time-limited. We’re not planning a 2020-sized deficit stimulus program that goes on forever.
During the Second World War, Canada ran massive annual deficits to pay for military spending – with the aim of winning the war, and rendering all that military spending unnecessary. That’s economic stimulus in a nutshell. The more successful it is, the sooner it’s no longer needed.
But the Trudeau government has been signalling that it intends to bring forward “bold and ambitious” new spending plans in the Sept. 23 Throne Speech, beyond traditional stimulus. Prime Minister Justin Trudeau has also said that tax increases aren’t on the menu, at least not yet. That suggests the possibility of a whole new category of debt-fuelled spending.
And that debt would not be born of necessity. It would be debt of choice.
That doesn’t mean any and all new spending ideas have to be rejected outright. But in addition to questions about what any new spending is for, there needs to be answers about how it is to be paid for.
There are basically two types of government spending. There are one-offs such as capital investments – something like a new subway line. Then there are ongoing social programs, such as the Canada Child Benefit, which is an excellent poverty-reduction measure introduced in 2016. It’s designed to require money year after year, forever.
Given today’s exceptionally low borrowing costs, there are arguments for taking on more debt now, rather than tomorrow, if that debt is used to build the country’s productive capacity. For example, it’s possible to make a case for accelerated spending on big city transit infrastructure. Build and borrow more now, rather than later.
But much of what the Liberals have been hinting at, and what others have been pitching, sounds more like continual social spending, not one-off infrastructure buys.
That’s not necessarily a problem; there are solid arguments for expanding this country’s social safety net. For example, this page has suggested the federal government should aim to achieve truly comprehensive medicare, by working with the provinces to ensure that every Canadian has not only health insurance, but also cradle-to-grave dental and drug insurance.
Others have talked about expanding daycare programs, as a way of drawing more women into the work force. It’s an idea that deserves serious study.
But those programs would need funding year after year, indefinitely. To pay for them, or other new social spending, Ottawa would have to make cuts elsewhere, or raise taxes.
Compared with most developed nations, Canada is not a high tax country. Set against Europe’s Nordic countries, the world leaders in quality of life, Canada has relatively modest social programs, and relatively low taxes. The former can be changed, but not unless the latter changes, too.
It’s not hard to draw up a list of social inequities Ottawa could spend money tackling. But doing so, via permanently higher government spending, isn’t possible without a concurrent increase in tax revenues. Ottawa can temporarily spend more – if necessary, a lot more – than current revenues. It can’t do so permanently.
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