Finance Minister Chrystia Freeland hugs Prime Minister Justin Trudeau after delivering the budget.Blair Gable/Reuters
The Trudeau government plainly intends this budget to be taken as the moment it pivoted from stimulus to investment, or from boosting demand, the total amount of spending in the economy, to expanding supply the economys ability to produce goods and services in response.
In principle this is appropriate, indeed long overdue, and not only because fiscal stimulus, in its current, Trudeauvian incarnation, has proved every bit as much of a bust as usual. (Fun fact: outside of the recession years of 2009 and 2020, growth has been slower, on average, under the Trudeau Liberals than it was under the Harper Conservatives.)
In the short term, increasing the economys productive capacity is the best contribution the government can make to the fight against inflation, where the bulk of the heavy lifting will continue to be done by the Bank of Canada. If inflation is too much money chasing too few goods, then one part of the answer, along with creating less money, is to make more goods.
And in the longer term, raising our anemic growth rate last in the OECD, according to a chart the government was brave enough to include in the budget is the only way we are going to be able to afford the astronomical costs of looking after the baby boomers in their dotage, or as it is more delicately known, population aging.
Thats the principle. If only it were matched by the practice. If the government has indeed abandoned stimulus the word appears only once in the entire document then how is it that it proposes to spend so much more than it did when stimulus was all the rage? Its true. Compare the spending tracks laid out in recent government statements. The government now projects program spending will average $11-billion more per year in this and coming years than it did in the December economic update, $23-billion more per year than in last years budget and fully $70-billion more per year than in Budget 2019.
The reason deficits are coming in under previous forecasts a mere $53-billion this year, versus the $59-billion in the December update, falling to $8-billion five years from now isnt, as the government suggests, because of its prudent management of the public purse. Its because revenues are up even more than spending $16 billion more, annually, than they were projected in December, $27-billion more than in the 2021 budget. The budget contains a chart showing a much more rapid decline in the debt-to-GDP ratio over the next 30 years than had previously been projected. But a line on a chart is not a plan, and a curve that can be shifted down with such ease can just as easily be shifted up.
Where is all that money going? It isnt going to beef up the military, if that was what you were thinking. Faced with what it describes as the existential threat of Russian aggression, the worst security crisis since the Second World War, the government proposes to increase defence spending by a total of $8-billion over five years. By year five, spending on the military would have risen from 1.4 per cent of GDP, at present, to 1.5 per cent. This is what the budget calls doing our part for NATO.
Neither is much of it going towards increasing the economys productive capacity, or growing the economy in budgetspeak, the supposed point of the exercise. Probably the $600-million over five years to be spent er, invested on better supply chain infrastructure would count towards this. Or the $2-billion to be spent on helping settle the more than two million immigrants to be admitted over the same period. You might even include the funds to be spent on increasing the supply of housing, on the theory that more affordable housing in our biggest cities will make it easier for workers to move to where the jobs are.
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But for the most part the government proposes to spend on the same things it always has: public services and income supports. These are worthy causes, no doubt well, some of them are but they are consumption items, not investment; their purpose is to redistribute output, not to increase it. The addition of public dental care, at an initial cost approaching $2-billion annually, is a particularly intriguing development in this regard: a program to be delivered not, as in most such exercises, through the provinces, whose jurisdiction it would appear to be, but directly by the feds.
Not that the cause of growing the economy would be much served if the government did spend more on it. Still, it is certainly good news that the Trudeau Liberals have discovered the supply side of the economy. There is even something to the Finance Ministers claim to be an advocate of modern supply-side economics, as opposed to the old-fashioned kind. There are, after all, two main ways of raising potential output. One is to increase labour productivity, the amount of output per worker.
The other is to increase the number of workers. Here the government deserves praise: it was a bold move to increase immigration even in the teeth of a worldwide pandemic, and as other countries were cutting back. Removing barriers to parents (read: women, mostly) participation in the labour force is also to be applauded, though whether this is best achieved by subsidizing daycare operators, as the government has now committed the country to doing, or by direct transfers to parents, is open to dispute.
But on the productivity front, Im afraid the message in the budget is very much more of the same. There is a voluminous literature on productivity, and its two main findings boil down to these: you need to increase the amount and quality of capital tools and equipment labour has to work with, and you need to ensure that labour and capital are efficiently deployed. The first is achieved by reducing barriers to business investment, whether in the form of taxes or restrictions on foreign capital. The second is achieved by removing barriers to competition, notably restrictions on trade.
There is next to nothing in the budget on any of this. Rather than cut taxes on business generally, there is a minor adjustment in eligibility for the lower rate charged to small businesses. That, plus a whacking great increase in taxes on banks. (Why the banks? Suttons Law, named for the notorious bank robber Willie Sutton, would seem to apply. Asked why he robbed banks he replied: Because thats where the money is.) Likewise, there is some of the usual boilerplate about doing something about interprovincial trade barriers, but little more.
In their place, the budget proposes a whole lot of central planning, dressed up in capital-friendly clothing. There would be a world-leading Canada Growth Fund, a new public investment vehicle that will operate at arms-length from the federal government. Uh huh. It would be given $15-billion in seed money to play with, which supposedly would attract another $45-billion in private capital. If that sounds familiar, it should. It was, for example, supposed to be the model for the Canada Infrastructure Bank, which a) proved to not be so arms-length as claimed, and b) has been staggeringly slow in investing both public and private dollars.
In addition, to correct our historic under-investment in R&D a constant sore spot with innovation enthusiasts there is to be a new Canadian Innovation and Investment Agency, to proactively work with new and established Canadian industries and businesses to help them make the investments they need, since if theres one thing business needs to make better investments its a government holding its hand. I say new to distinguish it from the dozens of similar agencies, programs, and incentives, at every level of government, that litter the Canadian economic landscape. None of them has added a dime to output, individually; collectively, they have almost certainly lowered it.
This is not new thinking, and it certainly isnt bold. If this country is ever to break out of the sluggish growth track in which it is currently stuck, it will have to do something quite striking, even shocking: abolish the corporate tax, renounce all foreign investment controls, something that would signal to footloose capital that this is the place to invest.
Instead, the budget offers a bowl of warm mush. It sets out no new course, makes no significant choices between competing priorities, but simply splashes out money in every direction, in much the same way as every previous budget. With, we must expect, much the same result.
Go in depth with The Globe and Mails budget team in Ottawa, who spoke with Menaka Raman-Wilms about what they expected in the federal plan and how that measured up against reality.
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Opinion: The good news is the Liberals have discovered our growth problem. The bad news is they don't know what to do about it - The Globe and Mail