‘A Kind of Newspeak’: ‘Modern Supply-Side’ Budget Downplays High Costs of New Spending, Say Experts

Finance Minister Chrystia Freeland tables the federal budget in the House of Commons as Prime Minister Justin Trudeau looks on, in Ottawa on April 7, 2022. (The Canadian Press/Adrian Wyld)

News Analysis

Canada’s Finance Minister Chrystia Freeland classified her budget as “modern supply-side economics,” but its greater reliance on government spending represents a new twist on the concept, some experts say.

In her April 7 budget speech, Freeland said that “housing and immigration and skills and child care” are not only social policies, but “just as importantly, they are economic policies, too.”

“Our strategy is what Janet Yellen, the U.S. Secretary of the Treasury, has recently dubbed ‘modern supply-side economics.’ Modern supply-side economics borrows the supply-sider’s key insight—that increasing supply is fundamental to growth—but takes a progressive, people-centred approach,” she said.

Steve Ambler, economics professor at the University of Quebec at Montreal, likens that to “a kind of newspeak that redefines spending as ‘supply-side policies’” and says it’s a departure from the concept’s basic tenets.

“Traditional supply-side policies involve encouraging private production by reducing red tape and by keeping public spending under control so that the burden of taxation can be reduced. Lower taxes will encourage investment by private businesses and increase labour supply by individuals,” Ambler told The Epoch Times.

By contrast, instead of a greater supply of capital and labour, what the government is supplying is more spending, Ambler said.

‘A Lot of New Spending’

“Federal spending will drop as COVID relief spending ends but will remain 25 percent higher than pre-COVID [times]. There’s a lot of new spending. The dental care spending seems to involve subsidizing demand for dental care. And new defence spending is just that, spending,” Ambler said.

According to Budget 2022 projections, for fiscal 2022–23, spending is set at $452.3 billion, with a deficit of $52.8 billion and a debt-to-GDP ratio of 45.1 percent. By 2026–27, spending will rise to $506.1 billion, the deficit and debt-to-GDP will fall to $8.4 billion and 41.5 percent respectively.

The program spending is expected to be $90 billion above 2019 levels in the next fiscal year. It’s buoyed by new programs with five-year costs including $5.3 billion for dental care, $9.4 billion for defence, $12.5 billion for subsidies for electric vehicles and clean tech tax credits, $10 billion for housing, and $10.5 billion for reconciliation with indigenous people. These are in addition to programs announced in 2021, such as child-care subsidies to reduce parents’ payments to $10 per day per child.

The $52.8 billion deficit projected for 2022–23 is down from the $113.8 billion projected for 2021–22, which is down from the $327.7 billion actual deficit in 2020–21, but Ambler said “this means the government will still have to tax more or borrow more (which means taxing more in the future all other things being equal).”

Ian Lee, professor of business at Carleton University, believes that more taxes and bureaucracy is the opposite of what supply-side economics is supposed to mean.

“Rather, it is an ideological attempt by liberals and progressives to rebrand government spending as ‘investment’—and justify the role of increased government and government spending by claiming that government-directed and -financed spending will address and solve the underlying problems of productivity,” Lee said by email.

“There is little credible evidence that I know to support this claim,” he noted. “Indeed, the evidence of the last century has shown that centrally planned economies generally are much less successful at creating a high standard of living than decentralized mixed economies that rely on the private sector to allocate and distribute investment.”

‘Double Taxation,’ Lagging Productivity

Budget 2022 introduced a one-time 15 percent tax on banks and life insurance companies based on their 2021 taxable income above $1 billion, a move expected to provide about $4 billion to the government over five years. Also, the federal tax rate for banks and insurers for income over $100 million permanently rises to 16.5 percent from 15 percent, amounting to about $2 billion in additional taxes over five years.

Ambler believes this measure has downsides.

“Corporate taxes are double taxation, plain and simple. You tax operating profits once at the firm level, and when shareholders receive dividends those are taxed a second time. This discourages capital accumulation and is an anti-supply-side policy,” he said.

“A tax on banks makes financial intermediation more costly and puts sand in the gears of the link between savings and investment—another form of corporate tax that will discourage capital accumulation.”

Freeland acknowledged in her budget speech that “productivity and innovation” were the “Achilles heel of the Canadian economy” and a “well-known” and “insidious” problem. She said she would tackle it “in part, with a new innovation and investment agency.”

Supply-side economics usually includes lower taxes, deregulation, and free trade, and Lee believes those are the very solutions that Canada needs to address its productivity problem.

“Canadian productivity has lagged U.S. productivity by approximately 20 percent for decades. There are numerous studies over decades. Many—but not all—have blamed Canadian protectionism in multiple industries, higher rates of both corporate and personal taxation, more stringent laws and regulations that inhibit or discourage growth,” Lee said.

“This can best [be] tested by examining flows of foreign investment into Canada—as FDI [foreign direct investment] is a barometer of investment attractiveness—because FDI flows to countries with the most attractive environment for investing. Our more restrictive framework, laws and regulations, manifest in relatively lower levels of FDI and lower productivity.”

Lee’s assessment is consistent with the argument in a Wall Street Journal op-ed published in February titled “The folly of ‘modern supply-side’ economics.”

Authors Phil Gramm and Mike Solon from the Washington, D.C.-based American Enterprise Institute think tank criticized Yellen for her approach, calling it a “phony version of President Reagan’s supply-side economics.” They pointed to a 2016 analysis by the Congressional Budget Office, which stated that “federal investment is estimated to yield half of the typical return on investment completed by the private sector,” to support their argument that government spending hurts supply more than it helps.

Supply and Demand Sides

Trevor Tombe, economics professor at the University of Calgary, says he doesn’t think Budget 2022 “represents anything new,” nor does he think describing it as “supply-side” is appropriate.

“Fiscal policy can be split between demand and supply sides,” he explained in an email.

“Demand-side policy is about increasing the amount of goods and services that are being demanded in the economy (i.e., government buying stuff), while supply-side is about increasing the capacity of an economy to produce (i.e., technology, more resources, etc.). Sometimes policy can be both, [and] almost every budget has some demand-side aspects and some supply-side aspects,” Tombe said.

“I think it’s fair to say something like child care has important supply-side effects to consider (if it’s increasing participation in the labour force of parents, for example). Government subsidies for innovation could also be supply-side (even if one was skeptical that they’re very effective).”

But he said that, rather than classifying a budget as either supply-side or demand-side, a better way to think about it is leave it to “reasonable people [to] agree/disagree with specific policy choices.”