Liberals claim we’re better off, but are we?
Don’t look now, columnist John Ivison writes, but the Liberals have a good-news message that they want to take into the next federal election campaign: They have made a real, tangible difference in the lives of middle-class Canadians.A Department of Finance report last week put the best possible gloss on the Liberal government’s record since being elected in 2015, but Ivison wonders whether the claim that Canadians have never had it so good really is accurate.Even if it’s the case that economic development is strong and the benefits of it are widespread, Ivison writes, how much of that progress can actually be attributed to the Trudeau Liberals?In what he describes as an attempt to sort truth from fiction, Ivison went through last week’s report — entitled Real Progress for Canada’s Middle Class — with Craig Alexander, the chief economist at Deloitte Canada.Many non-partisans have a simple voting strategy — they use their own experience to guide them. If they have fared well over the previous four years, they go on voting for the party they voted for before; if not, they switch.That’s why a report released by the Department of Finance last week was an important benchmark for the Liberal government. The report — modestly entitled “Real Progress for Canada’s Middle Class” — suggests the Liberal plan is working.“While there is more work to be done, Canadians are better off today thanks to these investments,” said Bill Morneau, the finance minister.His claim is that economic growth is strong, and the benefits are widespread; that middle class Canadians have more money to save and invest; that half a million jobs have been created since late 2015; and, that the share of working-age Canadians who are employed is close to a record high.The report put the best gloss on the Liberal government’s three-year record.But how solid is the claim that Canadians have never had it so good — and, if accurate, how much of it can be attributed to the Liberals?I went through the report with Craig Alexander, chief economist at Deloitte Canada, to separate truth from fiction.
The government’s contention is that the “middle class” tax cut introduced in December 2015 and the Canada Child Benefit have combined to boost incomes for typical families. The example offered by Finance is that a median income couple on $110,000 (after tax), with two children, would be around $2,000 a year better off.The tax cut was marginal, and probably went unnoticed by most people, but the sheer amount of money spent on the Canada Child Benefit — at $22 billion, it is roughly $4 billion a year more than under the Conservatives — means this claim falls into the genre of non-fiction.Finance notes that nine out of 10 deciles of family income have seen their family income rise as a result of federal transfers, including the Canada Child Benefit, the Guaranteed Income Supplement (received by low-income seniors) and the Canada Workers Benefit (aimed at low-income workers). The three measures have combined to provide a similar social security net to a guaranteed basic income.The Liberals claim that these investments will help lift 652,000 people out of poverty.Alexander agrees the Liberals have delivered on what they promised.“The Canada Child Benefit was a very significant policy measure,” he said. “It will reduce poverty for low-income families with kids and that transfer of funds wasn’t saved, it contributed to consumer spending.”The child benefit more than made up for infrastructure spending that did not live up to the bold predictions of the government in the first two years.
The Liberals claim that investments in infrastructure and new trade agreements, including with the European Union, have helped to reduce the unemployment rate to a 40-year low of 6 per cent, from 7.1 per cent in the fall of 2015, creating half a million full-time jobs. Employment gains are notable among women, with the rate for women aged 25-54 hitting an historic high.This claim needs to be put into context. This government is riding a cyclical wave and has benefited from the rebound in commodity prices, after the collapse in prices in 2015-16. Resource rich provinces like Alberta suffered a deep recession — the economy shrank around 7 per cent, before rebounding by 7 per cent.As part of the recovery, the economy grew at a gallop in 2017, with GDP rising 3 per cent.That tightened labour markets already under pressure because of an aging population (if there are fewer workers, it is easier to lower the jobless rate).Alexander gives credit to the government for removing barriers for women to help improve economic performance. But attributing the fall in unemployment to the government falls into the literary category of a tall tale — elements of fact, with blatant exaggeration.
The government claims business investment is also on the rise, pointing to six consecutive quarters of growth. The suggestion is that all is hunky dory with the wider economy.“When Canadians and Canadian businesses are confident, they invest in the things that help to grow our economy now and over the long run,” Finance said.Yet a slew of recent private sector reports say there are real concerns about competitiveness.A C.D. Howe report said spending on machinery and equipment is below 2006 levels and that businesses are making capital investments equal to $13,900 per worker, compared to $23,200 in the United States.Pipeline delays, rising electricity prices in Ontario, uncertainty over NAFTA and a U.S. corporate tax cut have added to concerns over weak capital spending, and are becoming “a threat to Canada’s future prosperity,” said the C.D. Howe report.Alexander said he believes Canada has a competitiveness challenge, particularly in light of Donald Trump’s corporate tax cuts. “Canada is a small economy and its domestic savings are never going to be enough to support the level of government and business investment required, so we need to attract foreign capital.”He said, traditionally, the triple attractions of a highly educated workforce, the accessibility of the U.S. market and a tax advantage have been magnets for foreign investment. But two of those can no longer be taken for granted. “The government of Canada needs to be mindful of tax competitiveness,” he said.Alexander mentioned one mitigating factor — Canadian business leaders are more risk-averse than their American peers. But the suggestion that the Liberal government has blazed a recovery in business investment would be classified in the literary canon as a fairy tale.
There is an opportunity cost to be paid for the massive investments in poverty reduction, in the form of fiscal deficits. Of this, there is no mention in the Finance report, even though the department has forecast the budget will be in deficit until around 2050.The rebound from the commodity shock distorted performance, but most forecasts suggest growth will fall below two per cent in the next two years. With an aging population and slowing labour force growth, it is going to be a challenge to maintain revenues.“At this stage of the business cycle, I don’t think the government should be running deficits,” said Alexander.THE GOVERNMENT IS RUNNING A STRUCTURAL DEFICIT THAT ECONOMIC GROWTH WON’T MAKE GO AWAY.The government has preferred to focus on the debtto-GDP ratio as its fiscal anchor — of course it would. But Alexander is skeptical.“I’m a sailor and that isn’t an anchor. The government doesn’t have control over the denominator in that ratio and when the next recession hits — and it will — that denominator is going to contract and the ratio will jump,” he said.Compared to its international peers, Canada is in reasonable fiscal shape.“The deficits don’t pose a clear and present danger,” said Alexander. “But the government of Canada is running a structural deficit that economic growth won’t make go away.”Justin Trudeau has made the calculation that voters have embraced the expanded social programs he campaigned on in 2015, and subsequently introduced, and they will show their appreciation by re-electing him next year.What he, and apparently the Department of Finance, would rather not point out is that their children will pay the bill.That story should be filed under the literary genre “tragic comedy.”
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