Dare we broach the subject of higher taxes?

Posted on July 30, 2020 in Governance Debates

Source: — Authors:

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.


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