SPEND NOW, REGRET IT LATER?
NEXT WEEK’S FEDERAL BUDGET COULD SIGNAL THE STA RT OF AN EXTRAORDINARY BURST OF SPENDING BY THE LIBERALS, WRITES ANDREW COYNE. THE MYSTERY IS WHEN CAN WE EXPECT THEM TO STOP?
The approaching budget has already ignited several fierce policy debates. Is stimulus necessary? Should the age of eligibility for Old Age Security remain at 67, or should it be rolled back to 65? Should the bailout of Bombardier be announced the following Friday, or the one after that?
Of these, easily the most entertaining has been the one between the prime minister’s Unnamed Advisers and the prime minister — or, on occasion, between the prime minister and himself. The subject: are the series of deficits the government has planned — originally capped at $ 10 billion in each of the first two years, now expected to average $ 30 billion annually for five — intended to provide a short- run jolt to the economy, on Keynesian lines, or are they justified by the need to invest in infrastructure projects that will raise national productivity and increase economic output in the long run? Both? Neither?
The Liberal election platform remains studiously ambiguous on the issue. The word “stimulus” itself does not appear. Nevertheless the document is filled with language to the effect that “our economy is stuck in neutral,” that it is time to “kick- start investment” in order to “turn our economy around and get it growing again.” If the plan was actually to increase the economy ’s productive potential by a few tenths of a percentage point over many years, you’d never know it.
A campaigning Justin Trudeau left no doubt. His deficit plan, he said on numerous occasions, was needed to “kick- start the economy.” Conservative “austerity” was holding the economy back. Liberal spending would liberate it. “We’re in a recession and growth has stalled so now is the time to invest,” the future prime minister said.
It was all for show, of course. Trudeau now tells interviewers that the day he announced the deficit plan, in contrast to the NDP vow to run balanced budgets, was the day he “won the election.” But there is little substantive difference between a balanced budget and a $ 10- billion deficit: The federal government spends $ 10 billion every 12 days. Whatever significance it had was purely symbolic.
Indeed, the intervening months have been filled with much debate about whether this was enough — some Bay Street economists were demanding deficits of $ 50 bil- lion or more — or whether, as most academic economists insisted, the whole idea was misbegotten. The limit ations of fiscal policy, after all, are well- documented, and have not changed. Simply put, the money has to come from somewhere. Either the government borrows from Canadians — in which case it leaves that much less for private investment — or it borrows from foreigners. And since foreigners can only lend us the dollars they earn from us on trade, whatever stimulative impact the increase in public spending may have is offset by a deterioration in the balance of trade.
At the very least, to justify such interventions there should be some evidence the economy is actually in recession. But of course there was no recession then, nor are we in one now. Neither is output falling short, as in Keynesian analysis, of its potential. Rather, potential output itself has been depressed by the collapse in oil prices. Alberta and Newfoundland are contracting. British Columbia and Ontario are expanding. Exports, in particular, are surging, as one would expect, with a 70- something dollar.
So it was not entirely surprising, though nevertheless startling, to see the Unnamed Adviser telling a Toronto Star reporter earlier this month that, in fact, the decision to go into deficit was never about stimulus. “Stimulus was never our objective,” he/ she said. “Revitalization of the economy for the middle class is our objective.”
“It’s never been, ‘ Let’s prop up this economy that’s not working for people,’ ” he/ she went on. “It’s always been, ‘ Let’s diversify it, revitalize it, clean up our growth trajectory and make sure that growth is more equitably and fairly shared.’ ”
Fair enough. Only someone forgot to tell the prime minister. In an interview with Bloomberg television this week, he delivered himself of the opinion that “we should be using fiscal levers a little more and not just expecting monetary policy” to support growth. Pure Keynesianism.
And yet at other points he disavowed the same levers: “What we’ re looking at is not so much trying to jo lt the economy into life as trying to lay the groundwork, the foundation, for better growth, better productivity, over the long term.” He added, “One of the things that’s really important to me is fiscal responsibility.”
If there is some confusion between the two concept s—short-run stimulus versus long- run productivity growth — it may be because the Liberal approach is in both cases the same: spend lots of money, now. With interest rates at historic lows, runs the argument, now is the time to invest in improvements to infrastructure — what used to be called roads and bridges—that can help raise productivity across the economy, and ultimately return more revenues to the government.
It’s not an unreasonable argument, in principle. Except comparative ly little — less than a third — of the $15- billion increase in annual spending the Liberals pledged in their platform is actually for infrastructure. Moreover, two- thirds of the money the Liberals have pencilled in for “infrastructure” is for social and environmental spending, which may or may not offer the sort of productivity payoffs associated with the term as it is traditionally defined. And even where the remainder is con- cerned, there’s no guarantee it will have any such effect.
It might, if there were some sort of market test attached: if the roads and bridges were to be financed by tolls, for example, as David Dodge, the former governor of the Bank of Canada, has recommended. It would then be possible to state with some confidence whether the return on the investment exceeded the cost. But then, the minute you do attach such a measurable return, the case for borrowing on the public tab disappears. Private investors could be enticed to supply the necessary funds, in return for the same flow of revenues.
And of course, there is the ever- present risk, when decisions about investment are vested in politicians, of politicization — the more so when, as now, there is a political imperative to spend the money quickly. It is something of a relief, then, to hear the prime minister announce that the focus in the first two years will be on “unsexy” things like maintaining and upgrading existing infrastructure, rather than building new projects.
Is there an alternative to the Liberals’ big- spending, top- down, government- driven approach to productivity, with its obsession with broad aggregates — with how much is spent, rather than how it is spent? Yes there is. It is one that focuses more on sharpening incentives for everyone across the economy — investors, managers, workers, consumers — to make more efficient use of scarce resources.
Such an approach might start by lowering marginal tax rates on investment: a key part of raising productivity is adding capital to labour. Yet the Liberals have already raised taxes on incomes above $200,000; combined with provincial taxes, our top marginal rates are now among the highest in the developed world. And while they have cut taxes on the middle bracket ( offering a windfall gain to those same upper- income taxpayers), the proposed new Canada Child Benefit, while in many ways a useful reform, will have the unfortunate side-effect of raising the implicit marginal tax rate facing families with children ( since the benefit is reduced as income rises).
A bottom- up productivity program would also aim to end subsidies that distort investment decisions and divert capital from more efficient to less efficient uses. The Bombardier bail out, though it will probably not be in the budget, goes in precisely the opposite direction.
Likewise, the promise to expand the Canada Pension Plan port ends still more centralized control of investment decisions: if not in political hands, then in wasteful, empire- building ones. A bottom- up approach would focus on competition as a means of forcing business to cut costs — opening protected industries to foreign investment, for example — not on concentrating capital further in a country already suffering from too much of it.
Last, the agin go ft he population, and consequent shrinking of the population of working- age, will place a premium on mobilizing every spare person- hour of labour. It is incomprehensible, in this light, to see the Liberals promising to roll back the age of OAS eligibility from 67 to 65, at a cost of several billion dollars annually: as if a retirement age of 65 were set in stone, notwithstanding the change in lifespans and the nature of work in the decades since it was first fixed in law.
These, at any rate, are the sorts of things the Liberals have been signalling will be part of their economic program. Lacking any visible benchmark of the “fiscal responsibility ” to which the prime minister claims to be devoted — the $ 10- billion cap long since discarded, along with the pledge to balance the books by 2020, with the promise to reduce the debtto- GDP ratio soon to follow — we seem headed for an extraordinary burst of spending, in answer to the demands of every conceivable interest.
It isn’ t going to bankrupt us, on its own. Still, it’s worrying. The first budget is supposed to be when a government does the difficult but necessary things, leaving it more room to spread the goodies about closer to the next election. But the Trudeau government, wildly popular as it is, seems more intent on keeping the feelgood vibe going as long as possible. When, if at all, it intends to bring the party to an end is at this point very much a mystery.