There is an argument for stimulus spending, says Gwyn Morgan, but runaway deficits in good times always means serious trouble.
In the 2015 federal election campaign, the Harper Conservatives proudly announced a no-deficit budget after years of working to rebalance spending and revenues following stimulus deficits necessitated by the 2008 global economic crisis. Justin Trudeau’s Liberals, behind in the polls when the writ was dropped, announced “modest” deficit spending totaling $25 billion in the first three years, returning to a balanced budget in the fourth.
Although this was seen as a risky strategy at the time, the Liberals were rewarded with a decisive majority.
That $25 billion ballooned to $70 billion. The promise of a balanced budget has been replaced by a $93-billion deficit over the next four years. The NDP and Green election platforms proposed even higher spending. Yet, despite campaigns featuring such a staggering accretion of our national debt, pollsters found that deficit spending didn’t rank as a major election concern for most Canadians.
Conservative Leader Andrew Scheer, striving to balance political reality against the dangers of driving the country ever deeper into debt, proposed a $25-billion deficit in the first year, moving to a balanced budget in five years.
Deficit spending didn’t rank as a major election concern for most Canadians.
The election results confirm that most Canadians have lost all fear of deficit spending, no matter how large.
In 2015, Canadian economic growth was declining, so stimulus spending was a reasonable policy. Most economists believe that governments should constrain spending in good times to preserve financial capacity for stimulus spending during recessions. Instead, the Liberals ran huge deficits in their first term, and are now planning to greatly increase deficit spending in the second. That leaves no financial room for a recession.
Since the last recession was in 2009, the Liberal plan would require 15 years without a recession – a most unlikely prospect. What would motivate the Liberals to risk putting Canadians in such economic peril?
The answer is that government spending is needed to offset a dramatic loss of private-sector confidence. A November 2018 Fraser Institute report stated: “The federal government’s introduction of higher taxes, mounting debt and increased regulation has left Canada a much less attractive place to invest. Crucially, Canadians have increasingly looked to other countries to invest, with the amount Canadians invest abroad rising 74 per cent from 2013 to 2017. At the same time … investment from other countries into Canada dropped a staggering 55.1 per cent.”
Government spending is needed to offset a dramatic loss of private-sector confidence.
The World Bank’s “Ease of Doing Business” analysis shows Canada dropped from fourth place in 2006 to 22nd in 2019. And a majority of respondents to a Business Council of Canada survey listed “uncertainty and lack of predictability in regulatory processes” as negatives for investors.
That was before the election. The prospect of a profligate Liberal minority government dependent on the even more financially destructive policy positions of the NDP is enough to send even more investors scurrying to the exits.
That economic signals have remained strong while private-sector investment and job creation has been shrinking can only be explained by those billions of deficit dollars. Canada’s economy has become dependent on ever bigger government spending while, at the same time, its policies discourage private-sector investment. As Italians know all too well, the end comes when deficits can no longer be financed, pushing the country over a financial cliff.
Canada has seen that cliff before. During the 15 years Pierre Trudeau was prime minister, federal spending rose from 30 to 53 per cent of GDP. Immense public spending overheated the economy, resulting in runaway inflation. By 1981, Canada’s prime lending rate reached an incredible 22 per cent.
The inability to meet skyrocketing interest costs induced widespread corporate and personal bankruptcies. Escalating mortgage rates caused many Canadians to lose their homes. With government bonds yielding 19 per cent, accessing business risk capital was virtually impossible.
By the time Trudeau-the-elder retired in 1984, Canada’s national debt had grown by 700 per cent and the country’s international debt ratings had collapsed. We were transformed from one of the financially strongest countries in the world into an economic basket case.
It would be two decades before tough fiscal discipline overcame compounding interest payments and began to reduce the country’s real-dollar debt.
The current annual cost of servicing Canada’s trillion-dollar “market debt” (borrowed funds subject to interest payments) is $26 billion. But as Canada’s debt keeps rising, so will the interest rate investors require to fund it. The $93 billion in Liberal deficit spending together with a modest rate increase of two per cent would take the annual interest cost to more than $50 billion at the end of four years.
As Mark Milke has argued, “every generation has to learn about the consequences of excessive borrowing for themselves.”
Just as the generation of taxpayers that came after Pierre’s reign ended had to pay for his profligacy, the next generation will bear the burden of paying down Justin’s debt. So why do most young Canadians vote for parties promising increased deficits?
As Mark Milke has argued, “every generation has to learn about the consequences of excessive borrowing for themselves.” Building an immense national debt is like taking out a huge mortgage, then leaving it for your children to pay back. But not only will today’s young voters have to pay down Canada’s massive mortgage, they will also foot the mounting cost of caring for the aging people who allowed it to happen.
Many young voters don’t yet see this coming – but there is a group working to shine a light ahead. They call themselves “Generation Screwed.” Kris Rondolo, 29, the group’s executive director, warns: “over-spending equals debt, and debt is an unfair tax on Canada’s younger generations and those not yet born.”
The Generation Screwed website includes a debt clock that shows Canada’s national debt amounts to $18,700 for every man, woman and child and is growing by more than $54 million a day.
A “How screwed are you?” link lets you add your share of provincial debt to the national debt. Ontarians are the most screwed, owing $43,200 each. Quebecers come next at $40,700, followed closely by Manitobans. Albertans owe $34,400, just a little more than British Columbians.
And now the debt clock will be going into hyperdrive for the next four years.
Gwyn Morgan is a retired Canadian business leader and a Member of The Order of Canada
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