Reining in post-pandemic spending.

In urgent response to the COVID-19 pandemic, our federal and provincial governments are by necessity imposing harsh restrictions on Canadians to promote favourable health outcomes, while disgorging liquidity to bridge our hobbled economy through the crisis. Though the emergency requires a forceful response from the public sector, when the crisis subsides we will need to roll back our temporarily heightened dependence on government.

Pre- pandemic, the Canadian economy was mainly market- based, private and profit- driven, with taxpayer-funded government services in health care, education and other sectors where the public interest is important. The OECD tracks the ratio of government tax revenues to GDP. The most recent Canadian tax/gdp ratio, for 2018, was 33.0 per cent, below the OECD average of 34.3 per cent and well below several European and Nordic social welfare states such as France (46.1 per cent), Denmark (44.9 per cent), Belgium (44.8 per cent) and Sweden (43.9 per cent). On the other hand, the U. S. tax-to-gdp ratio was only 24.3 per cent, reflecting the American free enterprise culture.

But the pandemic may be eroding Canada’s primary reliance on private- sector wealth generation.

Our federal government is rightly rushing to disburse cash through several new temporary programs — the CERB, the CEWS and the

CEBA, for, respectively, individuals, employers and small businesses — and a number of other liquidity-enhancing measures. With tax revenues falling sharply, this spending will explode the federal deficit, likely raising it to a stunning $ 200- plus billion this fiscal year. The impact on provincial government finances could be even greater.

To finance these unprecedented deficits our governments will be forced to borrow en masse and in bulk. Our tax/gdp and debt/gdp ratios are bound to rise. If we allow these higher ratios to become permanent, however, Canada risks becoming a social welfare state with impaired prosperity from excessive non-market resource allocation.

Bailouts will also raise the government’s weight in the economy. Government ownership or financial support of too- big- to- fail businesses may well become necessary in the short- term — airlines are a lead candidate — but bailouts undermine the free enterprise foundations of our market- based economy. This is not just an ideological point. In past decades, governments owned key players in our economy. We have experience of government ownership. Governments run businesses politically. They allocate resources in response to political, not economic imperatives. That is their purpose and virtue, of course, in those parts of the economy where we want political allocation. But in most parts of the economy economic imperatives should prevail.

We could also see increased government ownership or regulation on national security grounds to promote Canadian self- sufficiency in suddenly strategic industries — medical supply, for example. Even before the crisis we were forced to accept increasing government ownership in our oil industry, with the nationalization of the Trans Mountain pipeline and Alberta’s investment in Keystone XL.

The pandemic is changing our relationship with government in other insidious ways. Though mainly good-naturedly and in a public- spirited way, Canadians are obeying orders from public officials to stay indoors, close our businesses, and practice physical distancing and self- isolation. But it is not hard to imagine these intrusions leading to a permanently expanded government role in society. What will be the long- term cultural effect of millions of Canadians depending on government handouts to pay for rent, groceries and other essentials? Will government loans and subsidies sap both our entrepreneurial spirit and the aspirations of Canadian families and businesses to be financially independent and resilient?

A key challenge for Canadian society as we move carefully out of the lockdown is to restore the pre- crisis balance of private and public enterprise. We must ensure that our heavy reliance on our governments during this health emergency is only temporary, so that our primarily market- based economy continues to drive our standard of living and fund our social programs.

To this end, any government investments in Canadian businesses, whether through bailouts or as part of strategic industrial planning to promote national security, should be explicitly shortterm with planned exits to restore private-sector ownership as soon as profitably possible.

We also need Canadian families to rebuild their personal finances. Too many Canadians entered this crisis deeply in debt and unprepared for even a temporary loss of income. We should improve incentives for personal savings and financial self- reliance by enhancing flexibility for TFSAS, RRSPS and RRIFS and shifting the tax base away from income and toward consumption.

Above all, our governments must avoid steep increases in taxes. In the aftermath of the pandemic, we need to foster the free enterprise spirit of Canadians so they will restart and expand their businesses and get back to work. We should not smother the recovery by prematurely adding to our already high tax burden. Tax increases may eventually be required but only when the economy is less fragile and a thriving private sector has been re-established.

Rapid, forceful and unprecedented government action was necessary to fight the pandemic. But the next generation of leadership will need a different mindset to resist and unwind a culture of big government in Canada.