The $343-billion deficit for this fiscal year, announced in July by former finance minister Bill Morneau in his fiscal snapshot, was shocking at the time. Partly it was the number itself, which implied that debt would top $1-trillion before year-end. And because, with no budget or even a fiscal plan out of Ottawa this year, the tally was incomplete. Now Mr. Morneau is gone, and his replacement, Chrystia Freeland, has signalled at least another $40-billion in new spending – which will push the borrowing higher yet.
The 2015 election commitment to run “modest deficits” was a politically clever wedge issue – a pledge the Conservatives did not want to make, and the NDP dared not make. And borrowing in the depths of the COVID-19 crisis is better than tax hikes or program cuts mid-downturn. But neither political tactics nor the exigencies of a pandemic overturn the principles of sound public finance. The binge must stop sometime. When will Canadians decide they’ve had enough?
Interest payments are a clear, potential bad consequence of borrowing. We all know how out-of-control credit card debt or a big mortgage can squeeze household budgets. In the mid-1990s, when the federal government finally addressed the chronic borrowing that originated during the era of Pierre Trudeau, interest was absorbing 35 cents of every revenue dollar.
At present, though, a big interest bill seems a remote threat. Savers are buying bonds and central banks are printing money. Worries about defaults and inflation may well push interest rates up in a year or two. But in political terms, that is eons away. However painful the squeeze may be when it comes, it won’t make us stanch the red ink in 2020.
Another reason to dislike borrowing is that it erodes our fiscal capacity and limits our future choices. Like a household spending more than it takes in, or a business running at a loss, a government in deficit is depleting its capacity to provide future services. Mr. Morneau’s talk, as finance minister, about deficits as “investments” in the future, was flim-flam: Investments raise net worth; deficits lower it. Passing forward the bill for things we want now, but don’t want to pay for, makes future Canadians worse off.
But this erosion of fiscal capacity is gradual. We enjoy the government’s transfer payments and services now. Crumbling infrastructure and higher taxes to support less generous services – that is for the future. Like an onerous interest bill, it is something we may only regret when it is too late.
There’s a third reason to dislike big deficits, however. They promote waste. Good stewardship, at home, at work, or in government, means thinking about the value of each dollar we spend. Is it worth it? Where will we find a dollar to pay for it? Can we earn it? If not, what should we give up in return? That is the essence of smart choices.
When there’s no bottom line constraint, anything goes. Even before COVID-19, the federal government was spending more on everything – transfers and subsidies to households, business and other levels of government, and its own operating costs, including the salaries and benefits of federal employees. Since COVID-19, it has announced program after program after program. While it was understandable that supports designed on the fly would have gaps, the response to complaints that any measure – the Canada Emergency Response Benefit, credit-market supports, the Canada Emergency Wage Subsidy – were leaving someone uncovered was always to expand, add, extend.
We now have confirmation from the fiscal snapshot and Statistics Canada’s second-quarter GDP numbers that government income supports vastly exceeded the pandemic-related decline in Canadians' incomes. Seniors, students living at home, CERB recipients who had not worked – the list of payments made to people who did not need them or should not have received them is growing. And as the flood of spending continues, the examples that people can relate to – get outraged about – also grows. The examples of former cabinet minister Bev Oda’s $16 glass of orange juice, and former Royal Canadian Mint head David Dingwall’s $1.29 package of gum are years old – but we still remember the numbers. The WE scandal resonated not just because volunteers don’t get paid, but because the amounts paid to people involved were relatable.
The federal government’s embrace of debt is bad news. It will bring higher interest payments. It is eroding our fiscal capacity. We should not need outrage at silly examples of personal extravagance and waste to stop it. But those, too, are coming our way.
William Robson is CEO, C.D. Howe Institute