Liberals’ fiscal plan all for show
When the Liberals unveiled their proposal for modest, temporary deficits last August it was in the immediate wake of the revelation that the economy, earlier in the year, had declined for several months. This was readily spun into “Canada is in a recession,” which became the justification for the deficit, without whose stimulative effect the economy would surely never recover, or not soon enough.
True, there was also talk of how “investing” borrowed funds in infrastructure would pay off in long- run gains in productivity. But the emphasis was on, as Justin Trudeau put it, “kickstarting the economy.” And yet the deficit was to be only $ 10 billion annually, for two years, from an assumed starting point of near balance. Even in a recession.
Now here we are si x months later, and we are not, in fact, in recession. The economy is growing more slowly than was forecast a few months ago, but it is growing more rapidly than the Liberals claimed it was — since they claimed it was shrinking. Yet the deficit has somehow ballooned to $ 18 billion, without any of the Liberal stimulus plans having been enacted.
Economists are trying to puzzle out how it could possibly be that large, even after taking into account the now notorious $ 6- billion “fudge factor.” But let’s assume it’s legit: for federal revenues to have come in so far under projections suggests the Liberals were in fact assuming far stronger growth for the current year than they let on. As indeed they were. The recession claim was always just for show.
And yet, so far as deficits are supposed to be stimulative, we surely have all we could ask for: at $18 billion, the deficit is nearly twice as large as the one the Liberals prescribed, for an economy that is, again, not in recession, but merely growing slower than we’d like. Yet the Liberal fiscal plan appears to be unchanged: the same $10 billion will simply be added on top.
OK. So forget about stimulus. Let’s talk about productivity: growth in the long run. As we should. Because unless we do something to put incomes on a sharply higher growth track for the next 20 or 30 years, we won’t be able to bear the costs, mostly for health care, of the terrifying numbers of elderly coming our way.
In recent decades we’ve been able to raise incomes, not by making each worker more productive, but by putting a lot more people to work: we had the fastest labour force growth in the western world. Latterly we were given an additional boost from high oil prices. Neither of these apply any longer. So we really have no alternative but to get serious about raising productivity.
The problem with Canada’s economy, then, is not so much that growth is below potential as that potential growth itself is less than it might be. Short- term demand stimulus won’t help that. But investments that enhanced the economy’s productive capacity — aggregate supply — might.
Except only a fraction of the Liberals’ planned new spending — about a third — is for “infrastructure,” much of which is earmarked, not for the sort of projects that are acknowledged to have potential payoffs in higher productivity, but for “social” and “green” infrastructure. Even if you excluded them, the likelihood that such politicized “investments” will be subject to genuine tests of risk and return must be rated as slim.
But never mind. Assume the government means what it says. To reinforce the message, the government announced it had appointed an “advisory council on economic growth,” headed by management consultant Dominic Barton.
To take this seriously, you are obliged to absorb two rather charming assumptions. One, that sluggish growth is a problem that just cropped up, something the party has not had time to consider before this. And two, that all that has been missing in our approach to this problem to date has been the report of another advisory council.
In fact it’s not that complicated. What is needed is less of the kind of aggregate solutions the Liberals favour — inject more infrastructure or R&D subsidies at one end, out comes higher productivity at the other — and more systematic incentives for everyone, across the economy, to make more efficient use of productive resources.
To get them to do this, it is necessary only to do two things: a) let them, and b) force them. Let them, as in removing the impediments to efficient resource use: needlessly high tax rates, that deter investment; subsidies and other price distortions, that mask the true costs of things; and so on.
And force them, as in exposing them to greater competition. The real gains in productivity do not typically come from startling technological breakthroughs, but from thousands and thousands of incremental gains, in businesses large and small. Often these amount to no more than adopting practices already in place elsewhere. Still, human nature being what it is, people are disinclined to do so, until they have to — until they fear that if they don’t, their competitors will eat their lunch. The solution — more competition — seems obvious enough. Yet large sectors of our economy remain insulated from competition in various ways, from foreign ownership controls to regulatory barriers to entry.
Much of this is in the report by former BCE chairman Red Wilson (“Competing to Win”) that the Tories commissioned, then ignored. Much else is in the countless studies on productivity that have already been compiled.
But much of it, frankly, could be found in any economics textbook. If Dominic Barton does nothing more than to get the government to read one, the whole exercise will have been worthwhile.