The case for nasty, dirty, evil deficits

Paul Wells explains why budget debate should not be about spending alone


 
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Canada's Prime Minister Justin Trudeau (L) and Finance Minister Bill Morneau walk to the House of Commons to deliver the budget on Parliament Hill in Ottawa, March 22, 2016. (Patrick Doyle/Reuters)

Prime Minister Justin Trudeau and Finance Minister Bill Morneau head to the House on budget day. (Patrick Doyle, Reuters)

We are having to get used to some new ideas in Ottawa. Bill Morneau brought down the first budget of the second, cuddlier Trudeau era the other day, and—wait, is this the second Trudeau era? Perhaps it’s the third. After all, Joe Clark’s nine months in office divided Pierre Trudeau’s tenure into a first, long stint, from 1968 to 1979, and a shorter burst from 1980 to 1984. That sequel was all killer, no filler: it included victory in the first Quebec secession referendum, a rewritten Constitution and a world peace tour. (Actual world peace came later. In fact we’re still waiting. But the Cold War ended six years after Pierre Trudeau’s peace tour, so, you know, there you have it.)

But I digress. The broad outlines of the first Morneau budget are well known: Billions for public infrastructure, billions for health and education in Indigenous communities, taxes down over here but up over there, and a whopping deficit. To be followed by years of more whopping deficits in years to come. Those deficits, and the context in which they are being incurred, are one of the big stories out of this budget.

But another is subtler, and seems healthy. Two of the big programs in a budget full of big programs are strongly means-tested, which means you get more benefit the lower your income. This is true for aid to students, because enhanced Canada Student Grants will go, disproportionately, to the lowest-income students; and because a new income cutoff will ensure that no graduate who isn’t earning at least $25,000 a year will be required to repay student loans.

More significantly, it’s true of the Canada Child Benefit, which pays sharply declining amounts as incomes climb beyond what could reasonably be called middle-class. If your income is high enough you don’t get any benefit at all.

This program design breaks a taboo that never made sense to me. It’s often argued that social programs must be universal because the rich won’t pay, through their taxes, for programs that don’t benefit them. So for years I’ve heard arguments for lower university tuition. Even though plenty of people can afford to pay any price for university. Even though their money would help improve access for others. And when Trudeau argued against a universal child benefit, both Stephen Harper and Tom Mulcair criticized him.

Now we will see if support for family benefits collapses now that not every family gets a benefit. I suspect it won’t.

The budget’s big deficits—nearly $30 billion this year, falling to $14 billion at the end of the Liberals’ mandate, assuming they don’t come up with any new spending ideas—received much more attention. The size of the deficits blows a Liberal campaign promise to shreds, as does the news that Trudeau has no intention of balancing the budget before he faces the voters again. This is what many people, including Stephen Harper, said would happen: that when Justin Trudeau promised a more active government and, eventually, a balanced budget, he really only meant the first part.

The early budget coverage suggested a string of deficits will lead where strings of deficits led in the ’80s and ’90s: to an accumulated debt that, if it had continued snowballing, would have been unsustainable. It took a few days for observers, including the University of British Columbia economist Kevin Milligan, to do the math. Federal government debt as a fraction of the economy is half of what it used to be. Interest rates, which increase the cost of carrying debt, are comically low. (Provincial debt isn’t cause for immediate concern either: where it’s highest, in Quebec and Ontario, it’s finally started to decline.) Deficits on the scale of Trudeau’s are sustainable for many years to come—unless interest rates spike, in which case we’ll be into the soup again, but let us not borrow trouble.

The whole point of balancing the budget in the ’90s was that politics, understood as a debate over the cost and ambition of government, had become impossible. The kind of government many Liberals wanted was unaffordable because the cost of servicing that jumbo debt crowded out other uses. The goal of those first epic Paul Martin budgets was to get back to a point where the role of government could be the subject of healthy debate, because both a leaner government and a more active government were at least feasible. The debate could be on the merits.

That’s the situation Justin Trudeau has inherited. Gushers of new spending will offer both benefits—better roads, cleaner water—and dangers. The sponsorship scandal of the late Chrétien years was possible because it was obvious to every scoundrel with Liberal friends that spending on national unity would not receive close scrutiny from a government that was desperate to be seen doing something on the file. A government that considers the scale of its spending to be proof of its virtue is an easy mark for hucksters and worse.

So a more active government won’t always be wise. But its activism is sustainable. Which means the political debate will have to be over the wisdom of all this spending, not the mere fact of it. It’s a new time.


 

The case for nasty, dirty, evil deficits

  1. Canada’s total debt, federal, provincial, and municipal, is as large, about 60% of GDP as they were in the middle of the crisis in the nineties, and this is before the demographic health care deluge as the population ages. Many provinces are fiscally unsustainable.

    Harper created fiscal room for the provinces. Trudeau is going to crowd out the fiscal room for the provinces. There is only one taxpayer. Demographics tells us that it is the provinces that are going to need the fiscal room over the next generation, and thus, the federal government should exercise fiscal discipline.

    The fact is that Trudeau and Morneau are doing very little productivity enhancing “investment”. They are mostly just spending money on people that voted for them.

    With the demographic budget killers, health care, pensions, and education, the federal government should actually be pursuing disruptive solutions, rather than just feeding more money into the existing unsustainable systems. Harper was merely buying time. Justin is pedal to the metal towards the abyss.

    Japan has been spending massively on infrastructure, racking up deficits and debt for a generation, and they have gotten nowhere.

    At the end of the debt supercycle, which is where we are, more debt doesn’t work. The end of Keynesianism approaches. Japan and Europe have already peered over the edge into the nonsensical of negative interest rates.

      • Like father like son. Pierre’s legacy was rampant inflation, massive debt and mortgage rates of 19%. His son will do worse.

        • Pierre is the best loved Prime Minister in Canadian history

          I hope his son is as good.

    • $5.8B in 2008-09, $55.6B 2009-10; $33.4B in 2010-11; $26.3B in 2011-12; $18.4B in 2012-13; $5.2B in 2013-14 – a total of $144.7B. – the only question we should have is what did we get for all of that deficit spending … other than negative GDP growth (-2.5%) for the first time since Mulroney and then later a mini recession (+0.1%). The state of highways in Quebec and the limited service from Via and Go in Ontario indicate it might not have gone to infrastructure. Ontario got a lot of highly productive gazebos though.

    • The Federal debt alone in the 1990s was over 60%, not the combined Federal and Provincial debts. The Globe and Mail provides a nice article here -http://www.theglobeandmail.com/report-on-business/economy/national-debt/article24397940/ which provides a graph displaying net provincial debt for that time period. In 1996, when the Federal debt to GDP ratio peaked at 68%, the net Provincial debt to GDP ratio was at 27%. Combined that makes for a 95% debt to GDP ratio, much smaller than the current combined debt to GDP ratio of 66%.

  2. 1 B$ spent on Syrian matters – how much spent on
    struggling Seniors – receiving less than $ 20,000 / yr?
    The Liberals threw them under the bus.
    In a democratic country Justin Trudeau could be charged for treason and negligence,.

  3. “epic Paul Martin budgets” amen! the only period in many years that the government consistently had budget surpluses while at the same time GDP growth averaged a respectable 3%. All the same, the important issue is not how much a government spends but how the money is spent.

  4. Canada is in sixth place on the Forbes’ list of world’s worst debt bingers. Bring it Justin. This government is the same as all past Liberal regimes, filled with nothing but liars and thieves, bent on their own survival in the political world, Canadian citizens be damned.

  5. Alexander Hamilton – There is perhaps nothing more likely to disturb the tranquility of nations, than their being bound to mutual contributions for any common object, which does not yield an equal and coincident benefit. For it is an observation as true, as it is trite, that there is nothing men differ so readily about as the payment of money.

  6. “If you think you can spend your way to prosperity you’re dreaming in technicolor,” Bob Rae, after trying to do just that as NDP Premier of Ontario from 1990 to 1995

  7. There is more than one kind of deficit. It’s worth going into financial deficit to get First Nations communities on track. Aboriginals are the fastest growing group in our population and we will need this group to be ready to make big contributions to the economy in the near future. Besides, it’s the right thing to do. The challenge now is making sure the money is well spent.

    • Spending on Aboriginals will once again show the failure of Aboriginal leadership. Until Aboriginals pay taxes (particularly GST/PST/HST, municipal and education taxes) and be allowed to and want to own their own homes, no amount of money, especially on poverty stricken northern reserves where there is zero economy, will help. In fact, there is precious little that can be done for remote reserves. The best thing would be to help them re-locate where there is at least a semblance of infrastructure and a functioning economy. But that’s not PC; instead, Canada continues to become more and more a racist regime and a practitioner of identity politics.

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