More anything? More everything

If the Liberal party does not regain its parliamentary majority after lavishing $143 billion in new spending on every sub-set of the Canadian population, it should call a royal commission of inquiry.

Chrystia Freeland’s first budget professes to be about finishing the fight against COVID and building prosperity for the future. But the front-end loaded nature of the expenditure — $101 billion in the next three years — suggests it is much more about crushing the NDP and shaming the Conservatives for objecting to all the lovely, lovely spending in this 724-page leviathan. More anything? More everything.

The Liberals have been aided by a fiscal outlook that has improved significantly since the fiscal update last December. The deficit for 2020-21 has come in lower than anticipated by the Parliamentary Budget Officer at a still whopping $354.2 billion, or 16 per cent of GDP, but the budgetary shortfall for 2021-22 is forecast to be higher than the PBO’S estimate at $154.7 billion, thanks to what we might call the “window of opportunity” spending spree.

You think that sending the national debt to $1.5 trillion in the next five years (from $615 billion when Justin Trudeau came to power) is storing up trouble? Freeland has a quick response. Did you lose your job during the pandemic; are you a young mother who was forced to quit her dream job to look after your kids: did you graduate and struggle to find work? If none of those apply, you have no standing to criticize, she implies.

The mandate letter Freeland received from the prime minister when she got the job called on her to “preserve Canada’s fiscal advantage, guided by values of sustainability and prudence,” to regrow the economy and to present a fiscal anchor. Further, she was asked to support the economy without creating permanent new spending.

Presumably, she consulted her boss before ignoring his directions.

For what is the new $30 billion early learning and child-care plan, if not a permanent new program? It is aimed at reducing monthly child-care costs in parts of the country where they top $1,500 a month. Not entirely by coincidence, the highest cost cities are areas where the Liberals have hopes of garnering votes at the next election — Toronto, Richmond Hill, Markham, Mississauga, Oakville and Brampton. Implementation will require provincial buyin, since it appears to be a 50:50 funding agreement. That could take years, certainly longer than any of the young women made jobless by the pandemic can wait. Quebec, of course, will opt out and pocket compensation, on the basis that it already has cheap child-care.

Freeland has made much of the “Covid-induced “she-cession” and how the pandemic has created a “window of opportunity” for a child-care policy she clearly hopes will be her political legacy.

Yet the data suggests the relationship between COVID and child-care is tangential.

The unemployment rate among women aged 25-54 is lower than that for men (6.5 per cent versus 6.9 per cent in February). It is women aged 15-24 who saw their employment tumble 14 per cent year on year, and even here the job rate is recovering as retail and hospitality industry reopen. Given the average age of first-time mothers is 29, it can be argued the Liberals are using the pandemic as cover to introduce another expensive national program, on top of the $27 billion Ottawa spends on the Canada Child Benefit.

The child-care plan is not an outright bribe — unlike the $12 billion being spent over five years on bolstering the Old Age Security benefit, including a one-time payment of $500 on the eve of a likely election in August. There are sound economic reasons for increasing the availability and affordability of child-care, in the form of increased female participation in the workforce.

For the Liberals, it is sharp politics and smart policy — child care appeals to a core voting constituency and helps women enter the workforce.

Similarly, there is dual utility in the $4.4-billion plan over five years to offer interest free loans of up to $40,000 for owners to retrofit their homes to make them more environmentally friendly.

But the sheer amount of money sloshing around here means much of it does not improve the growth outlook, while all of it goes on the national debt.

For example, the government announced with fanfare that it will spend $3 billion to enhance Employment Insurance sick benefits from 15-26 weeks. Much more quietly, an annex at the back of the budget reveals EI premiums will rise for all workers — from $1.58 per $100 of insurable earnings to $1.83 by 2028 to keep the EI Fund in balance.

In the same vein, the government said it will spend nearly $9 billion over six years to give tax relief to low-income workers under the Canada Workers Benefit. But those workers will not become more productive. That is redistributive spending, not “investment”.

The budget is not bereft of investments that are worthy of the name. Allowing businesses to expense $1.5 million on eligible investments should encourage small to medium sized businesses to buy machinery.

An injection of $7.2 billion into the Strategic Innovation Fund should, in theory, improve Canada’s woeful commercialization record in the life sciences, aerospace and agricultural sectors.

But an opportunity has been missed to establish an equivalent to the Defense Advanced Research Projects Agency, which supports high risk, high reward science in the U.S. (it funded early research for GPS and MRNA vaccines). The U.K. announced its own DARPA in its recent budget and the Business Council of Canada has long argued this country needs a better bridge between academic research and the companies that can commercialize those ideas.

Yet even with the genuine investments that have been made, nobody can predict what the return on them will be, which should inspire caution in any future projections.

Instead, the Liberals have decided to extend the wage subsidy, rent subsidy and lockdown support until September, at a time when it should be transitioning to help the firms that are really in trouble. The government said it would predicate its budget on labour market performance but it appears to have ignored month on month improvements in jobs that has brought the unemployment rate down to 7.5 per cent, just two percentage points above where it was pre-pandemic.

Can we afford it, Freeland asked? “In today’s low interest environment, not only can we afford these investments in Canada’s future, it would be short-sighted of us not to make them,” she said.

It is a good rule of thumb not to believe a politician who says we can’t afford not to spend money that helps them get re-elected.

Yes, the debt to GDP ratio will peak at 51.2 per cent this fiscal year and fall thereafter, if things go according to plan.

Yes, nominal growth at 3.7 per cent in the 2020-25 period is forecast to outpace the yield on the 10-year bond, 1.9 per cent in the same period. As long as growth outpaces interest rates, Ottawa can say its plan is sustainable, even when public debt charges double to $39.3 billion by the end of the forecast horizon.

But, as Paul Martin said in his landmark 1995 budget, the debt and deficits are not inventions of ideology. “They are facts of arithmetic.” If you keep piling them up year after year, they will eventually reduce the federal government’s ability to deliver services.

Growth has exceeded interest rates for much of Canada’s history, averaging 6.2 per cent compared to nominal long-term borrowing costs of 5 per cent, according to economist Trevor Tombe.

However, between 1980 and 2000, borrowing costs exceeded growth by an average of three per cent, a predicament that was rooted in the 26 years of unbroken deficits after 1970 (most of them presided over by the current prime minister’s father).

You can be sure that even then, new programs were introduced as being so cheap, the government couldn’t afford not to spend on them.

It took Martin’s 1995 budget, with its $25 billion in expenditure cuts, to address the problem head on.

This Liberal government has already provided massive support to Canadians — providing what Freeland called “preloaded stimulus” by transferring much more to individuals than they lost in income in the first three quarters of 2020. According to Statistics Canada, households saved $10,507 in that period, compared to $1,157 in 2019.

Is it any surprise the Liberals are ahead in the polls when they have just funded a new car or a new deck for many Canadians?

Once the pandemic passes, there will be an explosion of demand. Ottawa’s job was to strengthen business investment, improve productivity and increase labour market participation.

But with an election pending, it was inevitable that the budget would be more focused on redistribution than growth.

This is a government that is far better at giving away money than generating it, collecting it or delivering services.

Trudeau and Freeland will get the credit for showering funds in all directions but will be long gone by the time anyone is obliged to account, if their cheery optimism in their own competence proves in error.

Former Bank of England governor, Mark Carney, recently renounced all other political allegiances at the Liberal convention. But his book Value(s) has warnings this finance minister should heed — that spending limits should be set and the economy brought back into balance in the medium term, with a debt servicing costs to revenue test used to ensure governments are not seduced by low interest rates.

“Just because something is possible, doesn’t make it optimal. Simple debt dynamics must be respected,” he wrote. “With time, living beyond our means is unsustainable, even if the exact moment when higher interest rates crystallize and drive brutal spending cuts is uncertain.”

It is baffling why a government so acutely aware about intergenerational fairness when it comes to global warming, is so ill-disposed toward the idea when it comes to fiscal discipline.

As Carney concluded: “(Policy-makers) say ‘we have fiscal space now’. Yes, but that’s someone else’s fiscal space. Therefore, we’d better be doing something that grows the economy so that those who were least affected by COVID aren’t paying for it.”

This budget does not do nearly enough to lighten the burden of future generations but then, despite its protestations, it was never really meant to.

FOR THE LIBERALS, IT IS SHARP POLITICS AND SMART POLICY.