(Adams claimed in the Galaxy Hitchhiker’s Guide that one of the reasons the fictional guide outperformed his competitors was because he had the words “Don’t panic” in large friendly letters on the blanket.)
As the bottlenecks are lifted across Canada, thoughts turn to the short-term recovery of the economy and repairing the devastation of the longer-term public sector balance sheets.
As the federal debt prepares to explode for $ 1 trillion for the first time, taxpayers who worry about these things (which should be everyone) may find it difficult to breathe and be seized by a feeling loss of control.
But they should still beat their heart rate and follow Adams’ advice.
The good news is that deficit and debt levels are not without precedent – even if previous historic highs came at the end of the most destructive conflict in history. (This year’s deficit is projected to reach $ 252 billion, or 12.7% of GDP, according to the Parliamentary Budget Officer; in 1943, the deficit represented 23% of economic output. Similarly, the debt will lie in the north 48% of GDP this year, suggested the PBO; at the end of the war, it represented 109% of production).
Taxpayers who worry about these things (which should be everyone) may find it difficult to breathe and be seized by a feeling of loss of control
Yet this crisis is almost, but not entirely, unlike everything that preceded it, to borrow another sentence from the Hitchhiker’s Guide.
With its booming post-war population, Canada recorded average growth rates of 5.7% in the 1950s and 1960s and quickly went into surplus.
When asked if Canada could replicate this post-war performance in a parliamentary committee, Parliamentary Budget Officer Yves Giroux said that a “divorce boom” is more likely than a baby- boom.
Economic growth over the past 20 years has averaged only 2.2% and the increase in productivity per worker has been even slower, at around 0.8%, half the rate of years 60 and 70. With the number of workers relative to the elderly falling from four to two over the next 40 years, it will be very difficult to come close to these post-war growth rates.
Chris Ragan, professor of economics at McGill University, said he does not believe that the solution to Canada’s damaged balance sheets is growth. Ragan, who served on the Trudeau government’s advisory council on economic growth, said that a focus on increasing output exempts politicians from making the tough tax and spending decisions that will be necessary.
“I am concerned about fiscal complacency, the amount of debt that will increase and the need to rethink government priorities,” he said.
Growth may not be a panacea for public finances, but the current crisis offers governments the opportunity to do what they should have done years ago.
Politicians across the country have always supported interprovincial free trade – until one of the protected industries in their province suffers.
But Philip Cross, a former chief economic analyst at Statistics Canada and a current fellow at the Macdonald Laurier Institute, said that it can take a crisis to break the deadlock. “Shocked companies can often put it to their advantage by discarding existing ways of doing things to drive growth.”
He said that the eventual withdrawal from globalization and the move towards self-sufficiency in products like medical supplies should provide an impetus for trade liberalization in Canada. “It is obvious and something where the federal government has all the cards,” he said.
Ottawa and the provinces signed the Canadian Free Trade Agreement in 2017, but it is about as toothless as the Kellogg-Briand Pact of 1928 as “forbidden war” – half of its 345 pages are filled with ‘exceptions and derogations.
The Canadian Constitution clearly gives the federal government the power to regulate commerce and commerce, but in practice the Supreme Court has limited this capacity in favor of the protection of provincial jurisdiction, as in the recent Comeau case on the management of passage of goods (in this case, beer).
The problem with regional diversity is that it fragments the Canadian market and increases the cost of goods. Estimates vary, but a Senate committee has set the price of internal barriers up to $ 130 billion a year.
It is high time for the premiers to follow the example of Jason Kenney of Alberta, who unilaterally eliminated most of his province’s exemptions on energy, alcohol and the sale of public land. It is high time that the federal government insisted that Canada act as a country rather than a patchwork of parish fiefdoms.
However, the balance sheets will not be restored by a commitment by the provinces to harmonize the regulations governing the size of beer bottles.
Realistically, the difficult choice remains between raising taxes and cutting spending.
McGill’s Ragan said one of his main concerns is the intergenerational inequality of letting our children and grandchildren pay for the current bailout.
“Most of me agree with the deficit. But does it go on debt at 30 years? Or should we say that we will return 31% of debt to GDP in five years, so that the beneficiary generation will end up paying the price? “
He suggested a pandemic personal income tax surcharge to pay down debt levels.
Ragan acknowledged that there was a reason why no one had formed an Economists political party. Raising taxes following the worst 100-year crisis could be a quick return to third party status for the Liberals.
But we are in an “unholy mess,” as former Prime Minister Stephen Harper recently said in an editorial in the Wall Street Journal.
Deficits will not disappear after a year – we could consider adding $ 600 billion to the national debt over a few years. Ottawa is able to borrow at rates below 1% at the moment, but governments around the world are issuing debt and it is unclear whether private capital markets will absorb all of this or, if they do, at what rates.
Deficits will not disappear after a year – we could consider adding $ 600 billion to the national debt over a few years
“So far, there has been no discussion of the serious tax implications – just an open credit card,” said Ragan.
The only example in recent history to suggest that we are not all related to Dante’s Hell is Canada’s experience in the mid-1990s. Jean Chrétien’s government was facing debt levels that reached a peak of 68%. The surge in debt has been compounded by high interest rates, as the Bank of Canada has attempted to contain inflation.
In response, then Minister of Finance Paul Martin undertook a spending review that asked public servants whether government involvement was necessary in each federal program and whether the program was affordable.
The historic 1995 budget announced a reduction of almost 20% in program spending. There has been a 14% reduction in transfers to the provinces; a 60% reduction in corporate well-being; and a reduction of the federal workforce by 45,000 people.
It would be difficult to replicate that kind of cut, especially when it comes to payments to the heavily indebted provinces that are struggling to cope with an aging population. But Canada was faced with an insurmountable debt wall that had been built over three decades.
It was a bitter drug, but it turned a $ 30 billion deficit in 1995/96 into a $ 14.3 billion surplus in 1999/2000, which ultimately allowed Martin to cut taxes on the income and capital.
As he emphasized in his 1995 budget: “Debt and deficits are not ideological inventions. These are arithmetic facts. “
His modern successor, the Minister of Finance, Bill Morneau, is far from proving himself to be another Martin, comforting the House of Commons finance committee this week by saying: “We remain capable of meeting this challenge on behalf of Canadians”.
But it would be more reassuring to hear how he plans to seize nettle after the immediate crisis has passed.