his week, finance minister Chrystia Freeland gave a major speech on the government's fiscal direction for the duration of the pandemic in a word, spending. All time-limited and temporary, mind you, but one of her biggest messages was that it's not the 1990s any longer, and we are not facing a debt bomb, and with interest rates at near-zero and staying there for the next couple of years, it's better for government to take on the fiscal burdens to bridge businesses and households through the economic recovery than it would be to let them take on that debt themselves. Nevertheless, the all of the usual pundits for whom it is 1995 and will always be 1995 have taken to their fainting couches about it.
To begin, it needs to be reiterated: It's not 1995. We are not facing a debt bomb. We had the lowest debt-to-GDP ratio in the G7 going into the pandemic crisis, and our debt payments as a share of the economy are the smallest they've been since the First World War. Government debt is not household or credit card debt there are different fiscal and monetary tools to deal with it, nor does this rhetorical device of treating government spending like household spending contemplate mortgages, which borrowing for capital expenditures can certainly be better likened to. Even going into the crisis, the very small deficits the country was running was in part because the previous government's austerity had been constraining economic growth, forcing the Bank of Canada to keep rates low in order for consumer spending to pick up the slack, which forced a rise in consumer debt across the country.
The question at this point should really be about how effectively we're using that deficit spending in this pandemic. Business and household income support for those who are affected by the pandemic and the various closures are necessary, and because Canada has been providing them at a greater degree than some other comparable countries, we have seen a better economic rebound than some comparator countries. This will no doubt have a longer-term impact by keeping people connected to jobs, and from going insolvent, or even forcing them to put themselves in dangerous situations or going to work sick in order to make ends meet something that has almost certainly contributed to the explosive growth of virus transmission in other countries.
Beyond that, the motto of "build back better" is certainly going to be on a lot of people's lips, but we need to have a good sense about what that actually means in a tangible way. The pandemic has exposed major structural problems in our society that we were happy to paper over and pretend weren't really there, because fixing those are going to be expensive. More to the point, it's going to require a lot of federal-provincial cooperation because most of those are within areas of provincial jurisdiction housing, childcare, long-term care, pharmacare, to name a few. And we need to remember that the federal government has a very limited set of levers that they can use to address these problems within the provinces, and most of those levers are financial.
That's going to be part of the trick, however, because for the spending to be effective, it should mean more than just cutting cheques to those provinces, but should have deliverables attached to them. After all, most of these issues have greater economic returns, but some are not obvious in the shorter-term. For example, providing housing is less expensive than current homeless supports; childcare has demonstrable economic returns as women enter the workforce; pharmacare has the potential to reduce overall healthcare costs as people can afford medications and not face catastrophic consequences from going without, because acute care is costlier than prevention. But provincial governments don't like strings attached to federal dollars, and don't like being told how to spend that money, and many of them are already balking at most of these ideas, fearing them to be too costly for them in the longer term rather than eventually delivering savings or economic growth (if they're not ideologically opposed them).
We can't ignore that some of these provinces are gun-shy because of the cuts that happened in the 1990s, and when costs were downloaded onto them. But we also can't forget that the 1990s austerity clearly hurt the most vulnerable and marginalized, and that most of us were wilfully blind to it. It's one of the reasons why the government's commitment to inclusive growth is important, ensuring that women and minorities are getting a chance to participate meaningfully in the economy. Leaving them out of the fold constrains our economic growth, and even the Bank of Canada has pointed this out at the point when we were approaching statistical full employment and had to start making choices about how to keep out economic growth going.
I also have to say that I lived through the Klein years in Alberta, as well as the aftermath, and they should provide a cautionary tale to those who would be preaching austerity because what it ended up leaving the province with were massive infrastructure deficits and more than that, they lost the ability to budget themselves effectively. In the years that followed, it became common practice to just throw money at problems, which got very expensive when the economy started to overheat, and in some cases made problems worse. But they paid down their provincial debt so everything was great, right?
While there remains room for skepticism about the size of deficits and ensuring that the spending is worthwhile, we need to move away from this simplistic "deficit bad" mindset, and the bromides that the only thing that matters are balanced budgets. Having a more robust conversation about just what it is we're spending on and what those economic returns will be rather than lighting our hair on fire at the sight of red ink will be far more productive than what we've been getting to date. The good news is that Freeland is a better communicator about these issues than her predecessor was, and she may force that better, necessary conversation.
Photo Credit: Jeff Burney, Loonie Politics
