Positive post-pandemic recovery needs a fiscal plan

Back near the end of World War II, federal cabinet heavyweight C.D. Howe found himself in hot water when he brushed off complaints about overspending on the war with a remark that the opposition twisted into “What’s a Million?” The phrase, allegedly uttered during House of Commons debate, became synonymous with Liberal government arrogance and fiscal imprudence.

Seventy-five years on the dollar figure was inflated several orders of magnitude as the House spent all of 4.5 hours last Monday debating a Liberal bill that, according to the Opposition Conservatives, will add $57 billion (that’s nine zeroes) to the federal deficit bringing it to $400 billion this fiscal year.

That $400 billion figure had only a brief shelf life. The very next day the Parliamentary Budget Office (PBO) put out a report estimating that the deficit for the year will be only $328 billion. Not only was that a lot lower than what the Conservatives were saying, it was less than the most recent government estimate, released in July by the since-departed finance minister Bill Morneau. As discussed here, Morneau’s Economic and Fiscal Snapshot 2020 projected a federal deficit for 2020-21 of $343 billion.

Basing its calculations on better tax revenues and lower cost estimates the PBO report projected a deficit for 2020-21 about $15 billion lower than that predicted in the fiscal snapshot, even with the inclusion of $28 billion in new spending announced over the summer.

As the table shows, the PBO update also projected a lower debt-to-GDP ratio, keeping the country a safe distance from the frequently cited dark days of the mid-1990s when, as some have falsely claimed, the federal debt-to-GDP ratio of 66.6 percent moved the country perilously close to bankruptcy.

A $43 billion turnaround from what the government projected and $72 billion less than the sum of all Conservative fears is not chicken feed. Put in perspective, the difference between the Conservative and PBO estimate number would be enough to keep Nova Scotia’s government operating for six years.

More to Come

But the PBO’s more conservative estimate was not the end of it. The scenario did not include several new promises in the throne speech and last week’s announcement of a $10 billion infrastructure plan to be run through the Infrastructure Bank. Given the Bank’s lackadaisical record the initiative is unlikely to add much to this year’s deficit but the announcement – another day more billions – will surely contribute to the sense that federal spending is getting out of control.

The Conservatives are certainly feeding that notion, as are much of the media and even the media friendly budget officer, Yves Giroux. Instead of framing the PBO’s most recent report as improvement in the fiscal outlook, many reports focused on Giroux’s comment that the federal debt is “barely sustainable.”

Talking heads on the cable news shows did  not explain that for the PBO, “fiscal sustainability means that government debt does not increase continuously as a share of the economy.” Becoming unsustainable does not mean that the country is going broke. It simply means that increases in spending or declines in revenue that exceed projections will lead to a rise in the debt/GDP ratio. The thing that is being sustained is not the whole fiscal structure of government, but a number – a number that despite going up from 31.1 per cent to at least 47.9 per cent this year remains by far the lowest among G7 countries.

Whether it’s the result of recent coverage or the residual effect of 30 some years of balanced budget dogma, the big numbers being added to the tab seems to be bothering Canadians, according to a recent survey sponsored by Canada 2020. They polled 1,585 Canadians in mid-September and found that 74 per cent of them want leaders to “be uncompromising to get finances in order” once the pandemic ends.

The Liberals have done little to address public concerns about finances. Their message track refers to having the “fiscal firepower” to deal with the COVID crisis but has been short on details. And while the Throne speech was packed full of new and recycled promises on child care, long term care, disability supports and infrastructure there is still no fiscal framework explaining how these needed improvements will be delivered.

What’s the Plan?

Since the pandemic began there have been suggestions that the Liberals, with their “whatever it takes” response to COVID-19, are drifting toward Modern Monetary Theory the notion that a sovereign country with the ability to control its own currency can spend as much as it wants. Recently popularized by American economist Stephanie Kelton in her book The Deficit Myth, the theory is that the level of government spending on public goods such as job guarantees and health care should be limited only by inflation, not deficit and debt targets. (This article by the CBC’s Don Pittis provides further discussion of Kelton’s thesis).

If the Liberals are indeed embracing the MMT they should let Canadians in on the secret and initiate a discussion on how to make it work. That would be no easy task given prevailing beliefs about government debt and the fact that Canada is a country of strong provinces which, lacking the ability to print money, may have to cede more of their autonomy to the central government.

The MMT approach may still prove to be the right one, but in the meantime there’s a middle course. Some critics from the business think tanks have been calling for a “fiscal anchor” to replace the declining debt/GDP pillar that’s been demolished by the pandemic. Just because it comes from the right doesn’t necessarily make it something to be avoided.

The latest budget office scenario projects the debt/GDP ratio holding at around 48 percent over the next five years, provided emergency pandemic spending is phased out and no new programs are initiated.But clearly, some new program spending is required. So what should be done in advance of a post-pandemic federal budget is to figure out the cost of addressing both the long-standing deficiencies and those brought into more stark relief by the pandemic.

This would involve coming up with a new debt/GDP anchor, somewhere between the 48 percent now projected for Canada and the 100 percent G7 average that has been projected by Finance Canada.  We could even look at the feasibility of following Japan and going to 150 percent if that’s what it takes.

In following this approach government may have the backing of Canadians, if the Canada 2020 survey is any guide. While 74 percent wanted the government to get the finances in order, 78 percent said the government needs to “implement extensive social programs to make sure Canadians across the country are safe and provided for.”

The longer the government waits to set out a fiscal vision that includes prudent new spending the more the discussion will be dominated by the same neoliberal voices that have driven the debate since the 1990s – voices like that of Aaron Wudrick of the Canadian Taxpayers Federation, who recently argued that “Ottawa has a massive deficit, so now is the time to focus spending on the highest priorities instead of shopping around for nice-to-haves (such as national day care and pharmacare) that simply add to the credit-card bill.”

There’s much to challenge in that statement, but running up the credit-card is a strong image. A lot has changed since 1945, but for better or worse, “what’s a million” still sends the wrong message.

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