It’s also probably not too early to worry too much deficit could unnecessarily crowd out all the other things we need to worry about after the COVID-19 pandemic ends.
At the very least, the current crisis and the massive use of public funds to respond to the threat could forever bury the idea – promoted by generations of politicians – that a government’s budget is perfectly analogous to that of a household.
Governments, unlike people, are forever (at least in theory). A government can accumulate and carry debts without necessarily having to worry about settling the matter completely.
A tradition of red ink
The federal government, for example, has always had a debt. At Confederation, while the new national government assumed the liabilities of the provinces, the federal debt amounted to $ 75.7 million. The first budget was balanced, with expenditures of $ 14 million and revenues of $ 14 million. But the federal government has run an annual deficit for three-quarters of its first 150 years, according to a 2017 federal finance story by Livio Di Matteo, an economist at Lakehead University.
In 1914, the federal debt was $ 336 million. In 1945, after World War II, the debt had reached $ 11.3 billion. In 1972, after the expansion of social protection programs after the war, the debt was $ 26.2 billion.
There has been a lot of enthusiasm recently about the prospect of the federal debt reaching $ 1 trillion as a result of recent pandemic relief. But the accumulated debt would almost certainly have reached this level at some point in the near future.
In 2006, the debt was $ 481 billion. A decade later, it was $ 634 billion. Before this crisis, the debt stood at $ 685 billion.
Meaning of the debt-to-GDP ratio
None of these figures constitute a crisis. But the fact of the public debt is not an unlimited spending authorization.
If a government’s debt begins to grow faster than the national economy, public finances can become unsustainable. Financial markets can lose confidence in this government’s ability to repay loans, while higher interest rates can make debt repayment more expensive. Higher spending and debt levels relative to GDP can also limit a government’s ability to respond to a crisis – like the one we are experiencing today.
In the 1990s, for example, the federal debt-to-GDP ratio reached 66% and borrowing rates were close to 10%. Under pressure from international markets, Jean Chrétien’s Liberal government has implemented deep cuts to control federal finances.
Our current situation is not that bad. Not yet, anyway.
At the start of this crisis, the federal debt-to-GDP ratio was 30.9%. In April, the Parliamentary Budget Officer predicted that – even after a sudden drop in economic activity and a sharp increase in federal spending – the ratio would reach 48.4%. Borrowing rates are around 1% and are expected to remain low for the foreseeable future.
A fragile consensus on the need to spend
And there is little controversy today about the need to spend public funds to support Canadians and keep the economy alive. In fact, with a few exceptions, opposition members – including the Conservatives – have asked the government to do more and do it faster.
However, some are beginning to voice concerns over the rapid build-up of debt and are asking what could be done after the crisis has passed.
Watch: Conservative Leader Andrew Scheer Calls on Government to Offer Economic Plan
In the short term, priority must be given to fighting a deadly virus and helping people and businesses cope with the resulting disruptions in normal life. Failure to provide this support now would only worsen the situation.
But it is difficult to know how events will unfold or what the budgetary situation will look like after the health crisis has passed. In an editorial published last week, economists Paul Boothe and Christopher Ragan explained why they see “good reason to worry about Canada’s emerging financial situation”. In counterpoint, three former analysts from the office of the Parliamentary Budget Officer argued that the finances of the federal government should remain viable and that the contrary concerns were “unjustified”.
The last time we really focused on cutting federal spending was from 2010 to 2015, when Stephen Harper’s Conservative government made a concerted effort to rebalance the books after the Great Recession.
Too much austerity, too soon
This restraint might have given the federal government a little more leeway to act now, but cuts to federal spending by the Harper government actually compromised economic growth at the time, as shown by a co-analysis. written by former Bank of Canada Governor David Dodge in 2016.
The Conservatives boasted in the 2015 campaign that they balanced the budget, but the price was a sluggish economy than it should be, while income inequality and other pressures on households could persist.
Beyond Canada, the surge in austerity after the recession has been linked to rising inequality.
This does not mean that budget cuts are bad, of course – but it might remind us that balanced budgets should not be seen as an end in themselves.
The Conservative government’s focus on quickly eliminating the deficit was in line with Harper’s desire to reduce the scope of the federal government. It is also part of a consensus after and during the 1990s in and around federal policy that still focuses on whether the ink of the government is red or black.
Justin Trudeau shattered this consensus, but the Trudeau years have not shown that restraint is unnecessary, or that the voting public no longer cares about balancing the budget. Some pre-pandemic spending by the Trudeau government may seem wise in hindsight (one of the biggest spending increases was for aboriginal programs), but even the Liberals may find it hard to justify every additional dollar they spent.
Bigger problems, higher priorities
The post-pandemic years may also require restraint that the Trudeau government has not yet demonstrated.
But the federal deficit will not be the only thing worth worrying about following this pandemic.
COVID-19 highlighted the gaps in long-term care in Canada and underscored the importance of child care. Women and low-income people have been hit hard by economic closure and could face lasting setbacks.
Climate change will remain a serious threat. Indigenous reconciliation will remain an unfinished project.
“The choice is not to carry a debt [or] austerity, “said Lindsay Tedds, economist at the University of Calgary. There are many more choices than that. ”
The way forward could, for example, involve both a review of federal spending and new investments. Tedds said the focus should be on “inclusive growth” – a concept that has emerged in recent years in response to concerns about income and gender inequalities and the existing barriers to further economic growth.
A better and fairer approach to public spending?
“In the aftermath of the recession, and as calls for austerity increase, the question that I think will be important is how this austerity is addressed,” said Miles Corak, a Canadian economist who performed work influencing income inequality. .
“If we have concerns about inequality, and in particular its long-term consequences, then it will be important that spending on government services – municipal governments, education, housing and health care – are all properly supported. “
To that end, said Corak, it might be useful to look at the revenue side of the equation to see if the federal tax system is “progressive and fair.”
Ideally, the threat of this virus will go away in time to give us all a moment to take stock. When that time comes, it might be good to remember that measuring the health of this country cannot be reduced to near budget.