In 1990, then-prime minister Brian Mulroney infamously quipped that a first ministers’ meeting about the Meech Lake Accord was “the day I’m going to roll all the dice.”
The 2021 federal budget rolls Canada’s dice again, by burdening a generation with more debt. One hopes the result is more positive than what befell the accord and the Mulroney government.
Some of us were hoping the budget would introduce a fiscal anchor to return us to the pre-pandemic net debt-to-GDP ratio of around 30 per cent. And it’s there — in 2055.
In the intervening 34 years, Canadians will shoulder a higher debt burden — around 50 per cent until 2025-26. A graph depicts it declining ever so slowly after that.
The projection presumably assumes no further major shocks to the economy. Economic growth would be steady, and interest rates, even if they increase somewhat, would remain modest.
But such an outcome would defy the history of the past five decades, over which we’ve had double-digit inflation and interest rates, two major recessions, a fiscal crisis, a financial crisis, several natural disasters, and now a public health crisis. It would be a unique roll of the dice not to have another shock to the economy over the next three decades.
While Canada would be in a better position to deal with it than when the pandemic broke out in 2020, public policy is largely an exercise in managing risk. The budget doesn’t provide an insurance policy for the very substantial risk to which it exposes Canada for a long time.
The debt burden is expected to stay high due to a combination of permanently higher public spending, economic growth that’s modest by historical standards, and, aside from a few minor items, an unwillingness to ask Canadians to pay for the higher spending.
Instead, that bill is passed forward to another generation. That generation already has a lot on its plate, including: adapting to a rapidly changing economy and job market; coping with environmental degradation, including an eventual $170-a-tonne carbon levy; and higher costs of education and CPP/QPP pension contributions. Now it will carry the burden of the response to COVID-19 and the cost of many new programs.
Many of those new programs are valuable. The problem is that, instead of being funded, they’re carried by debt.
The pandemic has shocked the economy’s supply capacity. Household income has increased in aggregate, and households have demonstrated an interest in spending where and when they’ve been able to.
Many argued that the budget shouldn’t use the $70- to $100 billion of “fiscal stimulus” set aside in the 2020 economic statement. Instead, it appears to go further, and allocates $101.4 billion in measures over the 2021-22 to 2023-24 period. But that’s not really the case. This whole issue has been clouded over semantics.
“Fiscal stimulus” is generally understood to consist of measures that encourage economic agents, especially households, to spend. The economy doesn’t appear to need that. And in fairness to the government and the budget, that’s not what the $101.4 billion does, for the most part.
About one third of the $101.4 billion is for extending pandemic-related supports to households and businesses. That is appropriate, given that the public health crisis continues, and, in many parts of the country, lockdowns have become stricter.
Much of the rest is to increase Canada’s growth capacity, rather than merely raise aggregate demand. Therefore, as in the budget’s language, they are more “investments” than “stimulus.” Included in this category would be: child-care support, which should increase labour-force participation; measures to better match labour demand and supply; and incentives to increase business investment.
Due in part to such measures, and the extended hit predicted in the fall economic statement, the budget predicts that the economy’s growth from 2000 to 2029 will return to the pre-pandemic estimate of a real annual GDP growth of 1.7 per cent.
While there should be concern over the lingering high debt burden, it should be acknowledged that it might have been worse. Some very expensive spending proposals have been bandied about for some time by the Liberals.
The budget doesn’t advance a national pharmaceutical plan. Gone are references to broad and expensive basic-income schemes. And while there are some enrichments to employment-insurance benefits, they’re more modest than what was suggested. Future increases in premium rates will likely be limited, which nonetheless are projected to rise by 16 per cent, thus dampening the effect of some of the measures to increase employment.
Budget 2021 may appear to lock Canada into a fiscal course for more than a generation, but it should be considered a first volley only. Once the pandemic settles to a degree, the country must figure out how to fund the higher spending so that Canadians in future don’t drown in our debt.
Don Drummond is a Stauffer-Dunning fellow and an adjunct professor at the school of policy studies at Queen’s University. He worked at Finance Canada for 22 years and is currently chair of the Canadian Centre for the Study of Living Standards. He’s also the fellow in residence at the C.D. Howe Institute and a member of the expert advisory group to the Canadian Institute for Climate Choices.