‘New normal’ going to be a fiscal mess

CANADA’S FISCAL POSITION ISN’T GOING TO BE NEARLY AS HEALTHY. — GURNEY

It seems ridiculous to be wondering about life when this is all over. We’ve got to get through this first — through the pandemic, through any follow-on waves and through the immediate-term economic damage. But eventually we will. And the cleanup is going to be spectacularly complicated, and ugly. It will change our politics.

On most fronts, there’s no point making big predictions about the changes the pandemic will bring. Human nature doesn’t change, so life will probably get back to normal faster and more completely than it seems possible to accept today. But there will be changes that endure, and our politics won’t be spared. Anyone who claims to know which party these changes will favour has probably also got a bridge to sell you, but the fact — the objective fact — remains that one critical part of our recognized political consensus no longer holds true: Canada’s fiscal position isn’t going to be nearly as healthy as we’ve gotten used to. Our political parties will all have their own responses to this, but there will be no ignoring it. The economy and our fiscal position have both been massively damaged. There will be no quick fix to that.

National Post reporter Tom Blackwell’s recent story on federal workers being told to ignore potentially fraudulent CERB and EI claims speaks to that point, and illustrates how quickly our previous fiscal health is eroding. Blackwell recounts the efforts of the federal government to simply shovel money out the door as fast as possible, despite knowing there was going to be waste and outright fraud. This is not incompetence on the government’s part. To be clear: this was a conscious decision — the government concluded that it was more important to get money into the hands of citizens and businesses that urgently and legitimately needed the cash than it was to carefully structure the program in a way that would weed out most of the duplication and wilful bad apples. Indeed, as Blackwell noted, the entire federal strategy is to get the money out as fast as possible and worry about recouping money later. This is such a priority, in fact, that the government has actually shut down its existing fraud prevention efforts.

That’s not a criticism. The government’s decision to prioritize speed probably was the correct one, given the scale and suddenness of this disaster. But this is still just one example of how wrenching the return to normal — whatever that means — will be. It’s gonna be a hell of a pivot when the government switches from getting money out the door as fast as possible (an additional payment to seniors was announced Tuesday), to getting as much of the money back as it can.

But that will come — and it will be necessary. One of the key operative assumptions of Canadian politics for the past 15 years has been that Canada could afford to spend. Even after the 2008 financial crisis, our overall federal balance sheet remained good, especially compared with our First World peers. The differences among our major federal parties were essentially ones of preferences — consider the Liberals’ 2015 pledge to run small, temporary deficits of $30 billion. Yes, they completely screwed that one up, spending vastly more than that, but that’s not the point. The point is that, as recently as five years ago, enough of us felt like it was OK to elect a government that was pledging to borrow and spend $30 billion just because, frankly, it could. Our balance sheet was healthy enough.

That party is over — or it will be, once the immediate crisis passes (indeed, right now, $30 billion seems like a rounding error on some of the announcements). The Parliamentary Budget Officer has already estimated that the federal government alone might hit a deficit of $252 billion this year (in fact, that’s now considered to be “optimistic”), and a deficit of a trillion dollars — a trillion! — is considered possible. That doesn’t include municipalities and provinces. A report from National Bank Financial, released Monday, estimated that the provinces, combined, would add a further $100 billion in debt (in contrast, the report notes that last year’s figure was $13 billion).

And all that accumulated debt will be borne by a smaller economy — no one knows how badly the economy is going to contract this year, but it’s almost certainly going to be in the double digits. The federal debt-toGDP ratio — the much-loved metric the Trudeau government used to assure us that all its earlier deficits didn’t matter — is going to soar to almost 50 per cent, as debt rises and GDP falls. Adding in the provincial numbers makes this picture even grimmer. A healthy debt-toGDP ratio gave all political parties room to manoeuvre. That’s gone now.

So yes, look ahead to some time in the future — months or years — when we are through this. The economy will be a mess. The federal debt-to-GDP ratio will be vastly worse than before. The provinces will be struggling, and also likely facing demands for more spending on health care and services for the elderly, where so many tragic weaknesses have already been laid bare. Once the pandemic has passed, and politics returns to something more like normal, this is going to be our new reality — a badly mauled economy and massively worsened fiscal position, alongside probable resurgences of protectionism around the world (including very possibly here in Canada), which will depress world trade.

In other words, it’s going to be a mess. And our new political normal.