Canadian Federal Budget: Deficit and Spend today – Pain Tomorrow

On March 22, 2016, the Trudeau Liberals unveiled the first budget of their tenure. From a glance, it appeared as though this was in fact a departure from the Harper era.

The document, titled “Growing the Middle Class” featured everything from tax benefits to low and middle-income families, to an overhaul of EI, to increased First Nations spending and beyond. But is everything as it seems at Parliament Hill? Or do Trudeau’s “sunny ways” come with a not-so-sunny catch?

Reversing the Worst of the Harper Years

The day following the budget’s release, the document was summed up by The Globe and Mail:

“[Finance Minister] Bill Morneau’s first budget opened the spending spigot after years of federal restraint… At the heart of the inaugural budget is gamble that more progressive-minded economists are right: Directing billions toward the middle class and the less fortunate will ultimately lead to stronger economic growth…”

To this effect, Trudeau’s Liberals have unveiled a bevy of spending commitments – ranging from minor pledges to well publicized, big ticket spending.

One of those major commitments is the new Canada Child Benefit. As of July, the vast majority of Canadian families can expect larger child benefit cheques in the mail than they previously received. And unlike the current program, the government has said the Canada Child Benefit will be means-tested (the poorer you are, the more you’ll receive) and tax-free. According the government’s figures, nine out of 10 families will see an increase in their payments, with the average annual increase being close to $2,300. Families with income under $30,000 will henceforth receive a maximum benefit of $6,400 per child under six and $5,400 per child between six and 17.

The $4.5 billion cost for the program in the next year alone will be partially offset by the shelving of Harpers’ income-splitting proposal, as well as tax credits for children’s fitness and arts expenses. By replacing these “boutique” tax proposals, which in many cases went to wealthy families that didn’t need them, the government has been able to simplify the system and make it more efficient. Strong parallels could be drawn with the Ontario Liberals, who have recently overhauled education funding in a similar fashion. Although, these cash payments do nothing to solve the lack of availability, and extortionate cost, of childcare in Canada.

Another major commitment is an overhaul of the broken EI system in Canada. This comes after months of stubborn insistence from Alberta NDP Premier Rachel Notley, whose province is racked by high levels of unemployment. The federal government has responded by extending EI for five weeks in 12 regions facing acute unemployment problems. This includes energy-dependent parts of western and northern Canada, and Newfoundland and Labrador. Older workers were promised up to an additional 20 weeks of benefits, meaning a worker could conceivably collect up to 70 weeks of EI. While premiers have complained that parts of hard-hit Saskatchewan and even Edmonton were left out, the overhaul has generally been lauded as “a good start”. Starting in July, the threshold for the amount of hours a claimant has to have worked will also be lowered from its current level of 910 hours.

Other notable commitments include $8.4 billion over five years for First Nations, $675 million over five years for CBC/Radio-Canada, the reopening of the nine Veterans Affairs offices closed under Harper and $3.4 billion over three years for public transit. In a word, the Trudeau government has promised to reverse the most egregious cuts made under the Harper regime. This should serve as a cause for celebration for all those who helped to oust the Conservatives from office in October. For many, this budget will serve as proof that Trudeau honestly intends to grow the economy “from the heart outwards.”

But the question must be posed: how will these promises be afforded? And furthermore, is this an honest change of heart for the capitalists and their party – the Liberals? Or is it simply a change of tactics?

A New Global Turn?

“Investment over austerity” have become the catchwords of the new Trudeau government. Sunny ways aside, “investment over austerity” is a simple acknowledgement of what his since become common knowledge to almost everyone. That is, that austerity and monetary stimulus have failed in their intended purpose of reviving the global economy since 2008-09. The strategists of global capital are now bending over backwards to uncover new solutions. But these “new” solutions are little more than repackaged caricatures of older ones. Austerity is being dismissed for the time being, and from its ashes comes a new mantra – “borrow and spend!”

Even the authoritative Economist magazine has been forced to alter its tone. From their February article Fighting the next recession: Unfamiliar ways forward :

“The growing constraints on monetary policy mean that fiscal fixes and structural reforms that work with the grain of stimulus polices are more urgent than ever. Big and long-running programmes of public capital spending would give private firms greater confidence about future demand and make a sustained recovery more likely… Central banks have done their bit. Although more work from them will be vital. It is now time for governments to be bolder.” (Our emphasis)

These words could have been spoken by Trudeau himself! And this itself should come as no surprise. Committing the country to a program of public spending is what allowed the Liberals to outflank the NDP and form a majority government during the last election. Now they will be forced to put it to the test. The recent budget is only the first cautious step in this direction. Every serious economist is now waiting to see whether Trudeau’s multi-billion dollar deficits will translate into sustained economic growth. Their question is the same: will it work?

The Multi-Billion Dollar Question

The Liberals campaigned on a program of deficit spending during 2015’s federal election. Trudeau promised that this would be capped at $10 billion annually. He also repeated that the plan to balance the budget in four years was "very" cast in stone. But this was based on Harper's rosy projections for the economy, which proved to be fantastically wrong. The continued decline in the economy threw Trudeau's plan very quickly into disarray. With his back against a wall, Trudeau was offered a stark choice: either austerity or larger deficits. Afraid of provoking a reaction from his supporters, he chose the latter. The promises he made were then ditched as fast as they were conceived.

What was a $10 billion projected deficit has quickly become a $29.4 billion one in the first year – approximately triple the original cap. The government then intends to run another $29 billion in the second year, after which it will gradually be reduced to $14 billion by 2020-21. Taken as a whole, the government is intending to run five consecutive deficits at a total sum of $113 billion – more than four times the $26.1 billion pledged on the campaign trail. This will take the existing federal debt load to a whopping $733 billion by the fifth and final year. All of the above figures are contingent on modest growth of the Canadian economy, and do not factor in the possibility of a China or Europe led crash.

This has given Trudeau room to manoeuvre for the time being. With the extra cash, he has been able to temporarily reverse the worst features the Harper regime. But even the rich kid Trudeau is not so naïve as to believe that money comes for free. As we've previously explained, borrowed money must be repaid with added interest to those who lent it. By 2020-21, interest payments on the federal debt will have grown by $9 billion to an incredible $40 billion annually. In other words, Trudeau cannot just dole out money willy-nilly, as he would be forced to claw back even greater amounts to repay creditors in the future. This would invite a backlash from Canadian workers, as they would inevitably be asked to foot the bill.

That is where infrastructure spending comes in. The argument is that if spending is targeted at things that can increase productivity (such as the building of bridges or roads), it can stimulate economic growth and thus offset the cost of the increased debt. The Liberals argue that they will achieve just that.

There is every reason to be skeptical, however. As we’ve noted in previous articles, only a small portion of the new cash will be directed at traditional infrastructure in the first place. But this is only the tip of the iceberg. Even by the Liberals’ shoddy definition of “infrastructure”, this funding only amounts to $4 billion this year and $7.3 billion the next. That would amount to a measly two-tenths of GDP in the first year, and four-tenths in the second. As noted in The Globe and Mail , “that’s roughly in line with the multiplier effects from the previous Conservative government’s infrastructure boost during the last recession.” And even then, the Liberals themselves admit that they are unsure how much their new spending will grow the economy. In an annex to the budget, the following is stated:

“It should be noted that there is some uncertainty, and debate, surrounding the size of fiscal multipliers [how much new spending will grow the economy],”

In fact, Finance Minister Bill Morneau is reluctant to even label his plan as stimulus, opting instead for “long-term growth”. That is not because his plan isn’t stimulus, it is – but because he himself is unsure that it will work. With the Liberals’ own optimism as our guide, we can confidently say that it will not.

Lessons of the Past

As noted by Andrew Coyne in The National Post, the next two years will likely see “the largest two-year increase in spending, outside of a recession, since 1972-1973.” But that is not the only lesson one could draw from the early 1970s. It is important to note how deficits were not always viewed as they are today. In fact, from about the early 70s to the mid-90s, they were considered the rule and not the exception.

In 1969, federal debt stood at a remarkably low 23 per cent of GDP (in 2015 it was at an also low 31 per cent). That changed when the debt spigots were thrown open by a man very familiar to the current prime minister – his father! With Pierre Trudeau in power, that figure would reach 37.5 per cent by 1983-1984. Under him, the average deficit stood at 2.7 per cent of GDP. But that number was only second to the man that succeeded him – Progressive Conservative Prime Minister Brian Mulroney. Under Mulroney, the average deficit stood at 6.7 per cent of GDP. By the time the Progressive Conservatives left office in 1993, the federal debt as a whole had increased to record highs of above 60 per cent of GDP. But this debt binge could not last forever.

In 1992, Standard & Poor’s downgraded its credit rating for Canada, alarmed at rising public debt levels. Moody’s would follow by downgrading its credit rating in 1994. In a January 1995 editorial for The Wall Street Journal, Canada was even labeled “an honorary member of the Third World.” At this point, it became clear to the capitalists that the country was fast approaching a full-on debt crisis. Fearing further instability, clear demands were put on their cronies in office to rectify the situation via austerity. By this point in time, those cronies were the governing Jean Chretien and Paul Martin Liberals. What followed was the inevitable consequence of years of rising debt, and arguably the deepest austerity in Canadian history. It is often forgotten that the most vicious attacks against Canadian workers were not carried out by the Harper Conservatives, but by the Chretien and Martin Liberals. As noted by Brian Lee Crowley in The Globe and Mail:

“Paul Martin’s 1995 budget proposed cutting billions in spending while reducing federal government employment by almost a sixth. The absolute dollar amounts of Ottawa’s total spending fell by more than 7 per cent from 1995 to 1997, while program spending (excluding interest) fell by almost 10 per cent.”

It was this same approach that became known as the “Chretien Consensus” – in reality a polite label for austerity. The Harper Conservatives only continued what Martin and Chretien had first started. If Trudeau can say he will run deficits, it is only because his predecessors have done the bulk of the dirty work for him. But the lesson remains the same: if Canadian history shows anything, it’s that borrowing money can only delay austerity. The longer the delay, the more painful the austerity.

All Roads Lead to Austerity

Finance Minister Bill Morneau is reaching even further into the past to sell his budget. As noted by Barrie McKenna in The Globe and Mail:

“Finance Minister Bill Morneau recalled the postwar glory days of infrastructure-building – from the Trans-Canada Highway to the St. Lawrence Seaway – as he rolled out the new spending spree.”

But as McKenna points out, “it’s not clear that this plan comes anywhere close to matching the grandiose projects that reshaped Canada’s physical and economic landscape in the decades after the Great Depression and the Second World War.” And how could it be any other way? What Morneau forgets is that the postwar period witnessed the greatest economic boom in capitalism’s history, which was itself a result of the Second World War. His government, by contrast, is presiding over the deepest crisis of capitalism in its entire history. Mr. Morneau, as well as the strategists watching him, will soon discover that building infrastructure doesn’t travel as far as it did 70 years ago. This government has only slumps to look forward to.

This puts the prime minister in a not-so-sunny position. Without any increase in growth, Trudeau will again be faced with the choice: either austerity or more debt. But even if Trudeau were to choose the latter, he could not do so forever. The bosses are not interested in a repeat of the 70s and 80s. They will forcibly apply the brakes the minute they feel things are getting out of control. They need only say “austerity,” and Trudeau will be ready with his reply of “how deep?” Trudeau senior may have had room to manoeuvre during his nearly 16 years of power – but junior will not be so lucky.