A minister’s tough week
Judging from Finance Minister Chrystia Freeland’s Sunday interview on Global TV, I suspect she did not have a good week. She was stuck defending the throne speech’s breathtaking permanent spending plans. Her replies, almost refuting the Liberal promises, failed to allay concerns over the growing mountain of debt and taxes implied by the burgeoning federal budget.
Freeland was spot- on to say “not all spending is equal.” Temporary financial supports provided during the pandemic are very different from new permanent spending. What is not clear, though, is how temporary support won’t become permanently guaranteed income. Paying people not to work can eventually hurt recovery as businesses try to hire workers back. And some support is poorly targeted. As documented by the Fraser Institute, $ 22 billion in COVID spending may have gone to Canadians with more than $100,000 in income, via CERB, student support and temporary boosts to Old Age Security.
The new permanent spending signalled in the throne speech is even more of a concern. Answering a question about debt, Freeland said the government would take a time- honoured “cautious” approach, something we have not actually seen recently. As minister of finance, she should be worried about endless demands that could result in hundreds of billions of dollars in deficits or new taxes this decade. Right now, I strongly suspect there is no plan.
The permanent spending promises read like a campaign document: early learning and childcare, longterm care, expanded EI reforms to include the self-employed, pharmacare, climate change spending on building retrofits and electric cars, a permanent OAS boost at 75, a disability benefit similar to the Guaranteed Income Supplement, affordable housing, water treatment and housing for Indigenous Canadians, rural broadband and support for regional airline routes. Oh, did I mention worker-training programs?
If you think demands will shrink in the future, think again. Even the new monies will be viewed as not nearly enough to cover long- term childcare and guaranteed incomes. Health-care demands will be revised to include the NDP’S proposal for denticare.
Speaking of dentistry, as documented by the Parliamentary Budget Officer, the potential cost of these new permanent programs is numbing. The Senate Finance Committee proposal for a non- universal guaranteed income could cost anywhere from $ 65 to $ 170 billion a year, which seems modest only when compared with CERB and the wage subsidy, which together have cost close to $115 billion in just six months. Pharmacare would cost another almost $20 billion a year. Climate change spending could be $10 billion per year, if not more. These programs alone would expand the federal deficit by another $ 100-$ 200 billion per year.
Minister Freeland talks a good game about “inclusive growth” but the Liberals’ spending plans are all about redistribution, not growth. The promise to create one million jobs relies on government spending to boost the economy. There is no plan to encourage private investment or job creation directly. If anything, huge new federal spending will crowd out private investment as companies realize how big a tax bill they could be hit with if they sink capital into Canada.
The investment shortfall is a major problem for a country currently falling behind in competitiveness. Pre-pandemic Canada already had a poor private investment record, with real spending dropping since 2014 in every sector except real estate. Not surprisingly, productivity has also flat-lined since then, which will eventually crimp wages.
The federal government is avoiding any talk about taxes. The throne speech mentions taxing “extreme wealth inequality,” including by limiting stock option deductibility and going after “corporate tax avoidance by digital giants.” But there’s not enough revenue there. Real money would come from hiking the GST or raising all income tax rates but that would mean the “middle class” would pay. Besides, why hurt yourself in the polls by reminding people all this largesse will end up costing them?
Maybe the government really believes it has no budget constraint and can simply roll over its debt forever without having to renege on payments ( though tell that to Argentines, Greeks and Italians). Maybe it really believes interest rates will be lower than GDP growth rates forever ( even if, right now, the 10-year government bond rate is 5.75 points higher than the forecast nominal GDP growth rate). Maybe it really believes printing money no longer causes inflation and the Bank of Canada can stop worrying about prices and start focusing on growth issues for “intersectional” Canadians — who are not those living near street corners but rather Canadians who belong to more than one minority.
This dreamy view of the world can be abruptly interrupted when bad things happen, as they have a habit of doing. Risk leads to higher interest rates, especially when the economy is highly indebted. From March to the end of April, Italy’s 10- year bond sovereign credit spread rose 53 basis points to 196.7 points. Argentina reneged on its debt in August after its 10- year bond credit spread rose by 1247 to 2978 basis points in the same period. That’s right: 2978 basis points is 29.78 per cent. Canada is not in a similar situation yet but if Ottawa doubles its debt over the next five years, its creditworthiness will be tenuous.
If our minister of finance wants a long political career, she will need to provide answers soon about how much spending and debt her government is willing to take on. Right now, we have heard only that we can’t afford not to spend. At some point, she will have to tell us we can’t spend what we can’t afford.