Finance Minister Bill Morneau will soon release the government's Fall Economic Statement and the expectation is for more stimulus spending and higher deficits. The surrounding debate in Ottawa has been mostly focused on "how" and "what" of deficit spending and insufficiently on "why" and "when." One increasingly gets the sense that theory and evidence are being subordinated by an impulse to borrow and spend.
The risk is that the adjective "extraordinary" is dropped from our conception of fiscal stimulus altogether and budgetary deficits are once again normalized. Outlays exceeding revenues becomes the default instead of the exception. Real trade-offs between the short- and long-term are neglected. And we end up with more red ink and little to show for it save for more debt and higher taxes over the long-term.
The government's update is bound to show deteriorating economic conditions and in turn a worsening fiscal picture. New estimates from TD Economics cut economic growth by $148 billion over the next five years and anticipate another $23 billion in accumulated federal deficits over same timeframe. Yet this disappointing news has done seemingly nothing to diminish Ottawa's proclivity for stimulus spending.
Short-term stimulus spending is far from costless.
Quite the contrary. Reports are the government is now committed to using even larger budgetary deficits to stimulate economic growth. Fortunately for the minister there's no shortage of ideas about how and on what he should be spending. Attend a pre-budget consultation of the parliamentary finance committee and one will hear countless ideas for new spending based on "economic impact" analysis and the power of the multiplier effect. Just "invest" in company X or industry Y and the rate of return will be three-, four-, five-fold, or more. If only it were that easy.
This focus on how and on what Ottawa should spend subverts more fundamental questions about why and when deficit spending is an appropriate fiscal policy response.
Short-term stimulus spending is far from costless. A large body of economic research shows that there are long-term costs that should be weighed against possible short-term gains. We may make the judgement that it's worth it to reduce future generations' prosperity somewhat to mitigate economic hardship present today. But we need to recognize that this is what we're doing.
There's been no such debate here in Canada.
There's no "free lunch" in other words. That's why fiscal stimulus should be "extraordinary." The onus should be on those who advocate for deficit financing to make the case that the trade-offs are worth it and that the long-term risks will be minimized.
There's been no such debate here in Canada. The tension between short- and long-term objectives has been minified. "Strategic investments" by the government have become the answer to the country's challenges. The multiplier will solve everything, including Ottawa's rising and protracted budgetary deficit. If only it were that easy indeed.
As part of his economic and fiscal update, Minister Morneau should codify a clear set of principles to guide Ottawa's fiscal policy. These so-called "fiscal rules" would focus on the "why" and when" of stimulus spending and incorporate clear benchmarks for eliminating the current budgetary deficit.
The budget process can thus become less transactional and more focused on big-picture questions.
The test should focus on the national economy rather than regional differences, and a sustained downturn rather than a short-term economic adjustment. Slowed growth is different from a major economic contraction as we experienced in 2008 and 2009, and the fiscal policy response should therefore be different. Calls for more fiscal stimulus every time global markets fluctuate or growth projections are revised downward risks intellectualizing irresponsibility.
The goal should be to restore the baseline assumption that the government should impose the taxes needed to pay for services it proposes to provide. Deviations from this baseline can be permitted where circumstances warrant but the onus should then be on the government to justify its decision and plan for returning to balance as soon as practical. "Extraordinary" should mean extraordinary.
Such fiscal rules would not help the government manage short- and long-term trade-offs, they can support the role of Parliament in scrutinizing fiscal policy in general and specific spending proposals in particular. New spending can be weighed against current spending and the relative merits can be judged. The budget process can thus become less transactional and more focused on big-picture questions about the long-term conditions for economic growth and rising living standards.
Minister Morneau's upcoming Fall Economic Statement represents an opportunity to shift the current fiscal policy debate from dollars to sense. It's time to get back to basics.
Sean Speer is a Munk senior fellow at the Macdonald-Laurier Institute.
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The Liberal government delivered its maiden budget Tuesday, March 22. A deficit of $29.4 billion in 2016-17, nearly three times the $10 billion promised during the fall election campaign, and a projected deficit of $17.7 billion in 2019-20 rather than the balanced budget that was promised in October. (Source: The Canadian Press)
One of the earmarks of the budget is a commitment to spending on aboriginal issues. This includes: - $2.6 billion over five years for primary and secondary education on First Nations reserves, including language and cultural programs, plus $969.4 million over five years for education infrastructure. - $1.2 billion over five years for social infrastructure for Aboriginal Peoples, including First Nations, Inuit and northern communities. - $10.4 million over three years for new women's shelters in First Nations communities, and $33.6 million over five years and $8.3 million ongoing for support services. - $40 million over two years for the inquiry into missing and murdered aboriginal women and girls. Read more here (Source: The Canadian Press)
The Liberals will be changing the structure of Canada's child benefits, ending income splitting and other tax credits for families and parents. This means: - $10 billion more over two years for a new Canada child benefit, absorbing and replacing both the Canada child tax benefit and the universal child care benefit. Targeted to low and middle-income families, the government says the new benefit provides an average increase of nearly $2,300 in 2016-17. - An end to income splitting for couples with children, the children's fitness tax credit and the children's arts tax credit. Read more here (Source: The Canadian Press)
The government will spend $2.5 billion over two years on a suite of changes, including reducing the required work experience for new entrants and re-entrants; halving the two-week waiting period; extending a pilot project to allow claimants to work while collecting benefits; simplifying job-search requirements; and extending the benefit eligibility window in specific regions with a higher unemployment rate. (Source: The Canadian Press)
- $5.6 billion more in benefits to veterans and their families over five years, including a disability award that increases to $360,000, retroactive to 2006, and an earnings loss benefit to injured vets of 90 per cent of pre-release salary. The government is also re-opening nine veterans' service offices across the country and adding a 10th. - Planned National Defence purchases worth $3.7 billion — ships, planes and vehicles — are being deferred indefinitely. Read more here (Source: The Canadian Press)
Planned National Defence purchases worth $3.7 billion — ships, planes and vehicles — are being deferred indefinitely. Read more here (Source: The Canadian Press)
The budget includes $3.4 billion over five years to increase the guaranteed income supplement top-up benefit by up to $947 annually for single seniors, and restore the old age security eligibility age to 65 from 67. Read more here (Source: The Canadian Press)
The Liberals broke a major campaign promise to cut the small business tax rate. Instead, the rate will remain at the current 10.5 per cent on the first $500,000 of active business income. Read more here (Source: The Canadian Press)
The Liberals will spend $1.53 billion over five years to increase Canada student grants to $3,000 from $2,000 for low-income students, to $1,200 from $800 for middle-income students and to $1,800 from $1,200 for part-time students. $2 billion over three years is also earmarked for a new strategic investment fund for infrastructure improvements at colleges and universities, in partnership with provinces and territories.
The Liberals' green infrastructure plan includes: - $2.2 billion over five years in water and wastewater treatment and waste management - $2 billion over two years for a low-carbon economy fund - Over $1 billion over four years to support future clean technology investments - $345.3 million over five years to Environment and Climate Change Canada, Health Canada and the National Research Council to take action to address air pollution. (Source: The Canadian Press)
The Liberals will spend $500,000 to help understand the role of foreign homebuyers in the country's housing market. The government says comprehensive and reliable data on the number of homes sold to foreign buyers does not exist right now. Read more here. (Source: The Canadian Press)
The marquee Liberal commitment to Syrian refugee resettlement could end up costing taxpayers close to $1 billion. The budget provided an additional $245 million over five years to bring in the remaining 10,000 people needed to meet the Liberal promise to resettle 25,000 Syrian refugees by the end of 2016. Read more here (Source: The Canadian Press)
$142.3 million over five years will be spent to add new national parks and improve access during the 150th anniversary of Confederation. (Source: The Canadian Press
The Grits will provide up to $178 million over two years for the provinces for urgent affordable housing needs. Read more here (Source: The Canadian Press)
The budget earmarks $38.5 million over two years to strengthen and modernize Canada's food safety system. (Source: The Canadian Press)
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