National Post (National Edition)

Manley urges PM to rein in spending

$343B DEFICIT

- JESSE SNYDER

OTTAWA • On Feb. 27, 1995, a sleep-deprived John Manley arrived in London, England, with an unenviable task: try to convince major investment houses to buy Canadian bonds, which had been nearing junk status as Canada's fiscal credibilit­y spiralled down the drain.

The banks and private equity funds were hardly receptive. Ottawa had just slashed spending by the most since the Second World War in a bid to lower its towering debt servicing costs, which soaked up 37 cents for every dollar spent. Weeks earlier, the Wall Street Journal ran the headline, “Canada Bankrupt?”

“I remember very vividly one of them saying to me, `You guys are always promising to bring your deficit down, and you never do it. Why should we believe you this time?'” recalls Manley, who was serving as the Liberal industry minister at the time.

As Prime Minister Justin Trudeau readies his speech from the throne on Wednesday, Manley has joined a chorus of voices saying the current government is again left with little fiscal room as COVID-19 emergency spending continues to mount.

Their concerns come after Trudeau has signalled a desire for “ambitious” new social and environmen­tal spending programs, raising concerns among some observers that the country could lock itself into a structural deficit.

A report by the C.D. Howe Institute on Tuesday, headed by Manley and Janice MacKinnon, former minister of finance of Saskatchew­an, warns that there is “negligible fiscal room for major post-crisis federal initiative­s without further raising taxes.” If Ottawa were to increase permanent spending by just $30 billion per year above pre-crisis levels, the report says, recurring deficits over the next 10 years would reach $75 billion — a decision that “leaves the country vulnerable to adverse shocks.”

Manley, who went on to become Liberal finance minister from 2002 to 2003, is in agreement with the vast majority of economists who say the current fiscal situation is not nearly as dire as the mid-1990s. Interest rates are near record lows, and are likely to remain that way in coming years as the economic downturn from COVID-19 lockdowns linger on.

But concerns remain over Ottawa’s longer-term fiscal position, particular­ly after Ottawa abandoned its fiscal anchor and has declined to provide a plan to return to budgetary balance. Agencies have downgraded Canada’s credit rating in recent months as spending climbs.

The COVID-19 pandemic has further muddied its longer-term fiscal plans, after Ottawa funnelled vast amounts of cash to businesses and people to keep them afloat during economic restrictio­ns. It is now projected to run a $343 billion deficit next year.

“I think we have, at a minimum, given up enormous flexibilit­y in our options,” Manley said in an interview. “We’ve done the right thing by protecting people’s incomes and keeping businesses alive. But it’s not without cost,” he said.

Higher spending and economic lockdowns caused Ottawa’s net debt as a percentage of GDP to balloon, from 30 per cent to around 49 per cent today. It was around 66 per cent in the 1990s.

The C.D. Howe report on Tuesday said that reducing Canada’s debt-to-GDP ratio by just one per cent per year would require Ottawa to trim spending by five per cent annually, beginning in 2022.

Adding to Ottawa’s fiscal woes are demographi­c challenges: Canada’s aging population is expected to put strain on the health-care system in coming years, raising expenditur­es. Elderly benefits, which already make up Ottawa’s single-largest expense, are expected to nearly double to $99 billion by 2030, according to a report by Royal Bank of Canada earlier this year.

In a separate report Tuesday, the Fraser Institute estimates that elderly benefits transfers and other seniors costs could inflate the federal debt-to-GDP ratio to as high as 69.6 per cent by 2050, if spending elsewhere is not curbed.

“Any significan­t deteriorat­ion of federal finances will bring with it serious consequenc­es for the Canadian economy, including the risk of repeating the mistakes of the 1960s to 1990s,” the report said.

Some economists suggest Ottawa can easily absorb its current spending plans if it would focus more on growing the economy, especially at a time when spending cuts remain politicall­y unpopular.

The C.D. Howe report on Tuesday suggested there was “little appetite in the population for the spending restraint that would be needed to shrink the debt-to-GDP ratio immediatel­y.” Public funds should instead be spent in a way that “promotes growth and incentiviz­es a return to work more broadly,” it said.

That could include spending on daycare to help women return to work, or investing heavily in infrastruc­ture to boost productivi­ty. The federal government, at least in its rhetoric, has so far focused more on public safety and on the redistribu­tion of wealth.

“They have not articulate­d the growth agenda, and that’s important,” Manley said.

Manley can easily recall the severe cuts he had to absorb as industry minister in the mid1990s. Programs under the industry portfolio were whittled down from 54 to just nine.

He doesn’t see deep cuts as the correct course of action today. But without robust economic expansion, the current fiscal trajectory is likely unsustaina­ble, he said.

“Where’s the growth going to come from?”

WE HAVE, AT A MINIMUM, GIVEN UP ENORMOUS FLEXIBILIT­Y.

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