New spending commitments from the throne speech will add more debt, increase fiscal challenges, and create bigger government without necessarily helping the economy, according to the Fraser Institute think tank.
In Wednesday’s throne speech, the Liberal government announced its plans to use “fiscal firepower” to support Canadians and businesses through the pandemic and “create a stronger, more resilient Canada.”
The government will extend the federal wage subsidy program to the summer of 2021, and support unemployed workers through the revamped employment insurance system, while ending the Canada Emergency Response Benefit program on Sept. 27.
It also plans to create a national childcare system, national pharmacare, and set national standards for long-term care. Significant spending to develop clean technologies is also part of the plan.
“This is not the time for austerity,” the speech said.
But Fraser Institute economists Jake Fuss and Tegan Hill say the substantial new spending commitments will add to Canada’s debt while not necessarily help the economy.
“These additional spending commitments will increase the size of government relative to the economy,” they write in an article on the think tank’s website. “Put differently, the government—not entrepreneurs, businesses and investors—will play a larger role in allocating society’s resources.”
According to the article, the size of government plays a key role in a country’s economic and social progress, and the size has to be appropriate.
“Indeed, a large body of research finds that total government spending (federal, provincial and local) that comprises between 26 percent and 30 percent (as a share of the economy) maximizes economic and social outcomes,” the article said.
“Beyond that, additional government spending can fail to meaningfully improve outcomes and in fact actually hinder economic growth.”
The economists also point out that in 2018, Canada’s total government spending (as a share of the economy) was already at 40.3 percent, and that was before the COVID-19 pandemic. Adding more spending with the announcement of the throne speech will steer Canada further away from the desired level.
“The long-term combination of persistent deficits, debt and potential rising interest rates means we risk repeating the near debt and currency crisis of the mid-1990s when federal debt-servicing costs consumed more than one-third (35.2 per cent) of federal government revenues,” they write.
According to the Office of Parliamentary Budget Officer (PBO), the federal deficit is now over $343 billion, a historical high in Canada.
Finance Minister Chrystia Freeland defended the new spending in a CBC interview on Sept. 23 when asked at what point the government can no longer afford funding for the “big programs.”
“I think the way to answer that question is to say these are things we just can’t afford not to do. The cost of failing to act is much much greater today than the cost of acting,” Freeland said.
“As it happens, we have the fiscal firepower to do it. We had a very strong fiscal position going into this crisis, and interest rates are really really low, the lowest actually in a hundred years.”
Parliamentary Budget Officer Yves Giroux, however, has cautioned about the sustainability of such a high deficit.
“It’s without a doubt that we cannot afford deficits of over $300 billion for more than just a few years. And when I say a few years, I really mean a year or two. Beyond that, it would become unsustainable,” he told Global News on Sept. 6.
“So if the government has plans for additional spending, it will clearly have to make difficult choices and either raise taxes or reduce other areas of spending. Because it’s clear that we cannot afford to have deficits of that magnitude for even the medium term.”
A Fraser Institute report titled Canada’s Aging Population and Long-Term Projections for Federal Finances released on Sept. 22 suggests that the federal budget is unlikely to be balanced before 2050.
“An aging population will continue to place upward pressure on federal finances and a new structural imbalance between revenues and spending means deficits and debt are likely to continue growing for decades to come,” the report said.