A recent C.D Howe report chastises the government’s commitment to implement national pharmacare and child care, while ignoring new fiscal tools at our disposal.
The global pandemic still very much with us, yet conservative pundits and think tanks are already setting the stage for fiscal austerity once the economy recovers to something like normal.
On October 20, the C D Howe Institute published a study by prominent academic economist and former senior finance official Don Drummond. It echoed a recent call for fiscal restraint after the pandemic by former deputy minister of finance and governor of the Bank of Canada, David Dodge.
Drummond presents four scenarios for the growth of federal public debt based on different levels of government spending in the future, and draws some fairly dismal policy conclusions.
“Even before the pandemic, Canada was not well positioned for big increases in federal government spending. It is even more constrained now by the borrowing associated with pandemic-related revenue declines, and far more by pandemic-related spending. The September Speech from the Throne paid no heed to this reality.”
His central message is that there is little or no fiscal room for large new federal government programs such as a national child care program or universal pharmacare. Instead, he calls for fiscal restraint as the pandemic subsides and setting traditional fiscal targets such as debt compared to GDP or a target date for a balanced budget.
Drummond fails to call for new tax measures to raise new revenues on the unconvincing grounds that the Liberal government has ruled out major changes. In a minority parliament, the ruling party’s word is hardly law. Many voices, including the Broadbent Institute, the CCPA, labour, anti poverty groups and the NDP, have called for progressive taxes such as a wealth tax, an excess profit tax and closing personal income and corporate tax loopholes to ensure that the fiscal burden of the pandemic is fairly shared, and to support the long-term public investment necessary to achieve a fair and sustainable recovery.
The wealthy and many large corporations have actually done well out of the pandemic, while much of the burden of high unemployment and reduced hours has fallen on low paid and insecure workers. The dynamic is being seen worldwide, sparking serious consideration of new tax measures in many countries and among international bodies such as the OECD and the IMF.
Drummond’s analysis overstates the burden of public debt by assuming that the effective rate of interest on the public debt will average 3.4%, about equal to the forecast growth rate of GDP. Yet the debt being incurred to fight the pandemic is mainly long term and financed at a much lower interest rate (eg, 0.5% for ten year bonds.) Most of the new debt is held by the government owned Bank of Canada, and could be just rolled over when the bonds mature if the economy is still in recovery.
There is no reason to think that the Bank of Canada will or should quickly return to “normal” interest rates unless and until there is a return to normal growth. So long as interest rates are lower than the growth rate, the level of debt will shrink as a share of GDP.
Drummond does not address the potentially serious impacts of fiscal austerity on inequality and insecurity, but he is also silent on its economic impacts.
Public spending is currently supporting employment and what meagre growth Canada can manage during the pandemic. A premature turn to cuts could result in stabilizing the debt at a very high cost in terms of higher unemployment, lower incomes, and reduced spending on public services and social programs.
He also fails to consider that cuts to public investment would reduce out future economic potential. We are doing no favour to future generations if we deprive them of high quality infrastructure, good education and skills, and setting a clear plan to deal with the climate crisis.
We certainly need a debate on future fiscal and monetary policy as we battle the pandemic and look beyond it. But we should discount the dire warnings of deficit and debt scolds who leave out the undeniable damage of inequality and opportunities to address it.
Andrew Jackson is the Senior Policy Advisor of the Broadbent Institute and the former Chief Economist of the Canadian Labour Congress.