Before we’d ever heard of COVID, there was a time when the first question asked of any Finance Minister delivering their budget was always: “Is it balanced?” Those days are long gone, and the pandemic is a big reason why.
Federal Finance Minister Chrystia Freeland delivered her 2022-23 budget this week, with a bottom line that is $53 billion in the red. Once upon a time that would have been considered a big deficit, but no longer. Very few of the questions she faced in the post-budget scrum had anything to do with the deficit.
Even the Opposition seemed half-hearted about attacking the red ink. Conservatives complain about Liberal “big spending,” but then propose their own measures (including tax cuts) that would produce a virtually identical deficit.
Best of all, that $53 billion deficit is melting away before our eyes anyway – without pompous rhetoric about “fiscal rectitude,” or without painful austerity. This year’s deficit is less than half the size of last year’s, which in turn was one-third the previous deficit.
The annual deficit has shrunk by $275 billion in just two years, even as the government announces new initiatives: like $5 billion for the dental care program it negotiated with the NDP.
What gives? Why is the deficit disappearing, both in dollars and in political importance? It seems that we’ve all learned a thing or two about budgets since the pandemic struck.
The first is that governments have virtually unlimited power to spend big when they need to. They did it before: like in the Second World War when no politician would dare to complain that Canada’s military effort was “too expensive.” And they did it again during COVID. Ottawa boosted spending $250 billion in one year to protect health, and keep Canadians working and in their homes; the provinces spent tens of billions more.
The second lesson is that infatuation with balanced budgets is misplaced and counterproductive. Economists have come to appreciate that deficits, even long-running ones, can play a vital role in supporting growth and jobs when other sources of spending (like business investment or exports) are inadequate.
The final and most pleasant lesson is that the best way to get rid of a deficit is not to slash-and-burn public programs – as Canada did in the 1990s, and Europe did in the 2010s. Apart from imposing avoidable harm on society (shrinking services and infrastructure), austerity also undermines the fundamental math of fiscal progress. By sapping the macroeconomy of so much spending power, austerity slows growth, causing self-inflicted damage to the government’s own budget.
The exact opposite dynamic is now occurring in Canada, to the delight of Ms. Freeland – and her provincial counterparts. Canada’s economy is firing on all cylinders. And government’s aggressive response to the pandemic is the main reason why.
Canada’s nominal GDP grew at an astounding annualized rate of over 13 per cent in the fourth quarter of 2021. Growth this year may be as fast, perhaps faster. The unemployment rate hit a new 50-year low of 5.3 per cent in March. Wages are growing as a result, pumping billions into Canadians’ wallets – and billions into government coffers (via income taxes and GST).
This rapid growth reflects a combination of recovery from the pandemic, strong job creation, rising world prices for our resource exports, and inflation. Indeed, for the first time in 30 years, growth is so strong the Bank of Canada is now struggling to keep inflation within its target range (of 1 to 3 per cent). That will mean higher interest rates in the coming months (though rates will stay low by historical standards). But that same inflation is boosting government revenues and shrinking the deficit.
This happy fiscal recipe is being enjoyed by provincial governments, too. Several have already balanced their budgets – even Alberta, which had the worst deficit of all (relative to GDP) during the pandemic. Across the country, remaining provincial deficits equal just 1 per cent of GDP: puny by any standard.
Through these hard and frightening two years, Canadians have learned government can and must do big, expensive things to protect us when needed. Governments were not put on earth to balance their budgets; they were invented to protect and advance the public interest. And the best way to pay for the things government does is to create jobs and grow the economy. That’s now happening in a big way – and Canadians are better off for it.
Minister Freeland did not set a specific timetable for balancing the budget, and this is appropriate: partly because medium-run projections are inherently uncertain, but mostly because we now realize it doesn’t matter. By the last year of her forecast (2026-27), the remaining deficit is no more than a rounding error. And it’s not any more significant in political terms, either.
Jim Stanford is an economist and director of the Centre for Future Work in Vancouver.
Post a Comment