In the early days of the pandemic, former Bank of Canada governor Stephen Poloz famously quipped that “a firefighter has never been criticized for using too much water” as he cut the central bank’s benchmark rate to its lowest level ever.
That’s been an anthem both for Canada’s monetary response to the pandemic, from the Bank of Canada, and its fiscal response, from the Liberal government -- better too much than too little.
Aggressive monetary and fiscal moves did provide comfort to Canadians (and markets) in those early days. Employment and the wider economy have bounced back faster than what was expected in the depths of last spring’s breathtaking downturn.
But, in part because of that faster-than-expected recovery, questions are now emerging about the need for the government to spend tens of billions more -- as much as $100-billion -- to further stimulate the economy over the next three years, as Finance Minister Chrystia Freeland signaled in her fall economic statement.
Economists are concerned not only that the government will overspend, but that it may be pushing money in the wrong direction, stoking inflationary pressures in the process. I look at that issue in the most recent Tax and Spend, and examine some of the ideas for a different kind of stimulus spending that would focus on expanding the productive capacity of the economy rather than simply pumping out billions of dollars.
As for Mr. Poloz’s quip, there might indeed be a time when firefighters face some questions -- if they, for instance, kept pumping water long after the flames were extinguished, and flooded the house.
Taxing Questions
Reacting to a recent Tax and Spend on rising bond yields eroding Ottawa’s hopes for cheap debt, one reader commented online that the federal government won’t be able to cut spending this year and so will need to raise taxes to pay down the debt it has accumulated. That strategy, the reader said, would replicate how Canada dealt with its massive Second World War-era debts.
There is debate over whether Ottawa will raise taxes (although Prime Minister Justin Trudeau ruled out broad-based increases in the fall). But that debate is more centred on Ottawa’s future spending than its past debts. Those debts aren’t entirely irrelevant, since they do result in interest payments.
But the key question is how much permanent spending Ottawa embarks upon, not how much debt it amasses fighting the pandemic-induced economic downturn this year and next.
As for paying off debt, that’s a rare fiscal feat in Canada, and for the most part, unnecessary. Keeping the growth of debt low -- in other words, very small deficits -- would over time push down the ratio of national debt to gross domestic product. Modest fiscal discipline over a protracted period is more the goal. And, as it turns out, that is what happened after the Second World War. You can read more about that here.
Have a Taxing Question? Send it to me here.
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Not a time for baby steps: Ottawa must pivot away from the free-market model for child care and instead embrace the idea of a system that is “fully publicly and operationally funded (not necessarily free) and publicly managed,” Morna Ballantyne, Martha Friendly and Susan Prentice write in Policy Options magazine. The authors acknowledge the “tricky shoals” of negotiations with the provinces and territories, but say federal dollars are a necessary part to ensure substantial and stable public funding.
Stepped-up costs for pandemic benefits: The Parliamentary Budget Officer says the cost of the Canada Recovery Benefit has jumped from its October estimate, in part because it expects the government to recover less from taxes and repayments. In October, the PBO said the CRB would have a net cost of $17.9-billion, after $2.8-billion was recovered. Now, that net cost over two years has risen to $22.93-billion, including the additional expense of increasing the maximum benefit payable and some methodology changes. But the higher net cost also reflects the PBO’s expectation that fewer recipients will see their benefits clawed back, reducing recoveries to $1.6-billion.
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Patrick Brethour