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September 24, 2020

From: William B.P. Robson

To: Members of Parliament

Date: September 24, 2020

Re: Will It Take Outrage at Waste to Stop the Federal Government’s Borrowing Binge?

The $343 billion deficit for the 2020/21 fiscal year, announced in the federal government’s July 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 the tally was clearly incomplete. Since then, further announcements have led some to predict a deficit close to $400 billion this year, and yesterday’s Speech from the Throne prefigured tens of billions of new spending – with borrowing to match – in fiscal 2021/22.

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 hiking taxes or cutting programs in the middle of the 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 consumer 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 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. Former finance minister Bill Morneau’s talk about deficits as “investments” in the future, was flim-flam: investments make us richer; deficits make us poorer.

But this erosion of fiscal capacity is gradual. We enjoy the government’s largesse 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 (CERB), credit-market supports, the Canada Emergency Wage Subsidy – was leaving someone uncovered was always to expand, add, extend. As the Speech from the Throne promises to do, yet again.

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 outrage people grows. Think of former cabinet minister Bev Oda expensing a $16 glass of orange juice and former Royal Canadian Mint head David Dingwall claiming $1.29 for a package of gum. Those examples are years old – but we 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 B.P. Robson is CEO of the C.D. Howe Institute.

To send a comment or leave feedback, email us at blog@cdhowe.org.

The views expressed here are those of the author. The C.D. Howe Institute does not take corporate positions on policy matters.

A version of this Memo first appeared in The Globe and Mail.