It’s the biggest issue nobody is talking about on the campaign trail. It wasn’t mentioned in the official leaders’ debates. It isn’t in the platforms. Journalists almost never asked about it.
It’s the next recession. Its arrival date is unknown, but some sort of economic contraction is inevitable, eventually. A recession is the elephant not yet in the room, biding its time on the doorstep. That nobody wants to notice it doesn’t change the fact that a future government, likely the next one, will have to wrestle it.
What would winning that wrestling match involve? A willingness on the part of Ottawa to quickly roll out a lot of stimulus spending – a very large deficit, in plain English. But it would also demand the political fortitude to make the deficit spending temporary, the wisdom to spend it wisely, and the good sense to neither cut off the medicine too soon nor keep spooning it out for too long.
How much new federal spending are we talking about? Likely enough to deliver a peak deficit of a $100-billion, more or less, depending on the scale of the recession.
That’s the conclusion of a recent analysis by economists at Scotiabank. It models what a downturn would do to the economy, and what Ottawa should do in response.
“In the event of a serious recession,” says the analysis, “fiscal support on the order of 4 per cent of GDP would be needed to pick up the slack.”
Early in this election campaign, we published an editorial with the following headline: The debt, the deficit – and other things this election isn’t about. Under four years of Liberal government, the budget has not been balanced, but deficits – last year’s came in at $14-billion – have been small enough for Ottawa’s already low debt-to-GDP ratio to fall a bit lower. There is no debt or deficit crisis.
Nevertheless, many Canadians, and a lot of pundits, think that deficits are always bad – the smaller, the better; the bigger, the worse. That’s mostly true in times of expansion, when governments normally shouldn’t run anything larger than modest deficits; for Ottawa that’s about 1 per cent of GDP, or about $23-billion.
But in the event of a recession, the recommended course of treatment is the opposite. A big deficit becomes part of the prescription.
A recession is a collapse in demand, where consumers and businesses lose confidence and pull back, delivering a chain reaction of contraction: people spend less, anticipating being laid off or seeing their pay fall; companies slash investment and production, anticipating fewer orders. As everyone retreats, so does the economy.
That’s where a stimulative fiscal policy comes in. A temporary increase in government spending takes up the slack from the collapse in private-sector demand.
It’s understandable why no politician wants to talk about any of this. Election campaigns love to wax eloquent about their sunlit uplands; a campaign featuring the economic equivalent of a natural disaster is a real downer. And given the public sensitivity around deficits, no party wants to promise that, when disaster strikes, they’ll borrow extra tens of billions of dollars to fight it – even if that’s what a government should do, and even if it’s what the Stephen Harper government did in 2009.
But filed away in its top drawer, the next federal government must have a game plan for the next downturn.
What would a solid plan look like? It would include two different kinds of stimulus spending.
Infrastructure spending has a high multiplier, with every dollar capable of generating more than a dollar of activity. And politicians love cutting ribbons. However, as Scotiabank’s economists point out, this spending takes time to roll out. That was true of 2009’s infrastructure dollars, some of which became bullets fired after the war’s end.
The other type of stimulus is transfers – giving people money. The goal is for them to spend it, immediately. The less money they have, the more likely they are to spend it; transfers should therefore be concentrated on those with low incomes, and the unemployed.
Whatever the mix, all of this spending will have to be temporary. It has to go on for as long as is necessary, and no longer. Canada’s next recession shouldn’t become an excuse for an expensive, permanent, deficit-busting spending program, or an expensive, permanent, deficit-busting tax cut.