Dare we broach the subject of higher taxes?

Posted on July 30, 2020 in Governance Debates

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TheGlobeandMail.com – Opinion/Editorial
July 29, 2020.   The Editorial Board

This year, the federal government will run a deficit that it has guesstimated at, give or take, $343-billion. But interest rates are so low that, even though the national debt is increasing by nearly half, to more than $1-trillion, Ottawa expects to spend $5-billion less than last year on debt service.

Canada is borrowing more than ever and it’s costing us less than ever. In the worst recession since the Great Depression, that’s been the gold-plated silver lining.

Ottawa kept the economy afloat by substituting borrowed public dollars for the private spending that evaporated when companies closed and people were laid off. Absent that, millions of Canadians would have been destitute; instead, because of programs such as the Canada Emergency Response Benefit, retail sales have rebounded to prepandemic levels.

But back to that $343-billion federal deficit. Is that kind of borrowing sustainable?

Yes, it is. And no, it isn’t.

Yes, assuming even modest economic growth in the decades to come, Ottawa can borrow these amounts, and more, and not have any trouble carrying the debt. Some provincial governments – hello, Newfoundland and Labrador – may have difficulty managing their finances, but Ottawa’s fiscal house is in solid shape.

That’s not a leap of faith; it’s just arithmetic. Current interest rates are so low that if Ottawa has the sense to lock them in with long-term bonds, debt-servicing costs will remain manageable for decades to come. Canada won’t “pay off” the debt; we’ll just watch as a growing economy gradually dwarfs it.

But no, Ottawa hasn’t discovered a bottomless well of magic money from which to draw $343-billion deficits, year after year, forever. Massive amounts of emergency borrowing are possible, and necessary, to end this crisis, heal the patient and return the economy to full employment.

But after that, it’s back to reality.

As we’re argued for years in this space, fiscal health doesn’t necessarily mean a balanced budget – just one within spitting distance. The Trudeau government spent the past four years demonstrating this. It showed – again, it’s just arithmetic – that so long as deficits in good times didn’t rise to more than roughly 1 per cent of gross domestic product, the debt-to-GDP ratio would remain stable or fall slightly. Over four years prior to the pandemic, the Trudeau government ran around $70-billion dollars worth of deficits, yet the federal books, which started in good shape, got a bit better.

In other words, Ottawa discovered that, in a period of modest growth and very low interest rates, it could spend 101 cents on the dollar. But beyond that extra 1 per cent of wiggle room, government outlays still have to line up with government revenues. Outside of recessions, to get the things we want from government, we largely have to pay for them through taxes.

When the economy is back on its feet, taxes are something Canadians are going to have to talk about. Canadians can have a future of stronger health care, better education, less poverty, less inequality and more opportunity. These are good things, but they’re not free. They’re going to have to be paid for.

Politicians aiming to offer a future of more than the status quo – and right about now, Canadians want a return to something better than just a rehashed 2019 – are going to have to broach the dreaded subject of taxes. Because beyond all the caveats laid out above, governments can’t spend what they don’t have.

Since 2015, the Trudeau Liberals have marginally increased the size of government, introducing poverty-reduction measures such as the Canada Child Benefit, while at the same time lowering most people’s taxes. The Harper Conservatives strategy had been to cut your taxes and pay for it by making government smaller, but the ability to spend 101 cents on every dollar of revenue allowed the Liberals to deliver a government that taxed slightly less (for all but upper-income earners), yet did slightly more.

But spending a cent more than you take in is a strategy with limits. If Canadians want government to do more – and there’s more that needs doing, on national challenges of health, education and poverty – they are going to have to find ways to pay for it all. Arithmetic says they are going to have to talk about taxes.

https://www.theglobeandmail.com/opinion/editorials/article-dare-we-broach-the-subject-of-higher-taxes/

 

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