WE MUST RUN DEFICITS IN BAD TIMES, TO BRING ON THE GOOD TIMES, AND WE MUST RUN DEFICITS IN GOOD TIMES, TO AVOID THE BAD TIMES. THIS IS HOW YOU GET $20-BILLION DEFICITS AS FAR AS THE EYE CAN SEE.
Somuch for Canada’s revenue windfall
The 2018 fall economic statement begins with a puzzle. Economic growth, it trumpets, is strong — the strongest in the G7 in, er, 2017. Unemployment is at a 40-year low; capacity utilization is back to prerecession levels; profits are up; wages are growing faster than they have in eight years.
All this good news has produced a bumper crop of revenues to the federal treasury: an average of roughly $5.5-billion more annually over the next couple of years than was projected in the spring budget. Yet deficits are now projected to be … higher than expected — at $19.6 billion and $18.1 billion, respectively, about 10 per cent over forecast.
What explains this surprising result? Simple: as it has done throughout its tenure, the Trudeau government took the revenue windfall and spent it — every last dollar and then some.
This is what the government calls “carefully managing deficits over the medium term.” It used to talk about reducing or even eliminating deficits. Now it seems devoted to doing whatever it takes to keep them in the $20-billion range, in perpetuity.
To be sure, the current set of projections, like its predecessors, shows deficits declining majestically in later years. But somehow in the here and now they never do. Once upon a time, this was supposed to be owing to a shortfall in revenues, the fruit of the Harper government’s supposed obsession with austerity.
By now this is not even pretended. The last Harper budget projected revenues for the current fiscal year at $326.9 billion, enough for a small surplus. The latest estimate has them at $328.9 billion — yet the deficit stands at $18.1 billion. Even allowing for a couple of billion dollars in accounting adjustments, it’s clear what is going on. These are deficits of choice, not necessity.
The mathematical explanation, then, is simple enough. The policy explanation is harder to come by. If the economy is so strong, why are we still running deficits? The government spin is that the strong economy is because of the deficits — and therefore that deficits cannot be reduced, for fear of weakening it.
You understand. We must run deficits in bad times, to bring on the good times, and we must run deficits in good times, to avoid a return to the bad times. This is how you get $20-billion deficits as far as the eye can see.
Which would be tolerable, were we not in the tenth year of an expansion — at the very height, as that volley of data off the top was meant to show, of the business cycle. If we assume no future recessions ever, no problem. But factor in the growing number of threats to the expansion — ballooning U.S. deficits, rising interest rates, a gathering U.S.-China trade war, the chaos over Brexit — and the folly becomes apparent. Demand stimulus is all very well in bad times; otherwise, governments should make fiscal hay while the sun shines.
The news is a little better on the supply side. The government has at last noticed the threat to Canada’s competitive position posed by the December 2017 U.S. tax reforms, with their deep cuts in corporate tax rates. By noticed, however, I do not mean to say they have adequately responded.
Not so long ago, Canada’s corporate tax rate, federal and provincial combined, was roughly half the comparable American rate: a marginal effective tax rate (METR) of 17.5 per cent to their 35 per cent. Today, thanks to both U.S. tax cuts and Canadian tax increases, it is slightly higher: 21 per cent to 19 per cent.
Many economists and business groups have urged the government to seize the opportunity for broad-based tax reform: countering the U.S. rate cuts would not expand the deficit, as it has done in the U.S., if it were accompanied by a closing of costly and inefficient tax preferences. As a second best, many recommended some version of the U.S. tax bill’s immediate expensing of business investment.
What, in fact, did the finance minister produce? 100 per cent write-offs in the first year, four times faster than current depreciation schedules, for some types of investments in some sectors — only machinery and equipment, and only for manufacturers and clean energy producers. The rest of the economy gets a less dramatic acceleration of deprecation rates, albeit applied to a broader range of assets.
The result: the existing disparity in the rates applied to different industries and different investments is, if anything, widened — the very opposite of what tax reform should be about.
Still, at least this is somewhere in the right neighbourhood. Likewise, the statement talks the right language on trade, foreign and domestic: Expanding Canada’s already impressive network of international trade agreements and reducing barriers to interprovincial trade will help to offset some of the loss of competitiveness on the tax side. Certainly it holds much greater potential than the industrial policy busywork that so fascinates this government: the “five pillars,” six Economic Strategy Tables, technology adoption centres and so on, none of which will make a dime’s worth of difference.
But there’s a notable lack of detail: recitations of past actions, more than announcements of future steps. For example, the statement ringingly “reaffirms the federal government’s commitment to strengthening free trade within Canada.” This turns out to mean “working with provincial and territorial partners to accelerate action” on a handful of files. This would be a more impressive pledge if there were any visible action to accelerate.
“Working with the provincial and territorial partners” is exactly how we got into this mess — with a Canadian Free Trade Agreement, the latest of several failed initiatives, with more pages of exceptions than inclusions. What’s needed is federal leadership: legislation under the trade and commerce power to establish a true and enforceable economic union, as is the case in self-respecting federations.
Oh, but you’re wondering about that package of juicy tax credits for the news industry, tucked inside the chapter on “Continued Progress for the Middle Class” with little advance fanfare. That deserves a column of its own.
Prime Minister Justin Trudeau shakes hands with Finance Minister Bill Morneau on Wednesday following the fiscal economic update in the House of Commons, which featured tax changes to encourage business investment.