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For Canada’s 150th, warning signs that current federal deficit spending mirrors history


Warning signs that current federal deficit spending mirrors history   #LSN_Opinion

VANCOUVER BC  February 8, 2017 -- Since Confederation, excluding wartime and recessions, there has only been one period in Canada’s 150 year history when the federal government’s role in the economy—and society more broadly—substantially grew, which in turn plunged the nation into chronic deficits, finds a new study by the Fraser Institute, an independent, non-partisan Canadian public policy think-tank.

It began under Prime Minister Lester Pearson in the mid-1960s, and continued under Prime Minister Pierre Trudeau throughout the 1970s and early 1980s.

“Based on the new federal government’s tax increases and new spending, the question is whether we’re embarking on another period of government growth, financed by deficits and debt,” said Livio Di Matteo, an economics professor at Lakehead University, Fraser Institute senior fellow and author of A Federal Fiscal History: Canada, 1867-2017.
According to the extensive study—which tracks government spending and revenues from Confederation to the present—except for the First World War, the Great Depression, the Second World War, and the 2009 recession, the only other time the federal government kicked off a deficit-spending spree and expanded the size and role of the federal government was in the mid-1960s and 1970s under Pearson and then Pierre Trudeau.

In 1969/70, when Pierre Trudeau was first elected Prime Minister, federal program spending totalled $12.9 billion, the estimated net federal debt was $19.3 billion and the debt-to-GDP ratio was 23 per cent.
By the time Trudeau left office in 1984, having never balanced the budget, the deficit was $37.2 billion, program spending hit $84.3 billion, the net debt had ballooned to $212.6 billion and the debt-to-GDP ratio was 42.2 per cent.

In the 2016/17 budget—the first of Prime Minister Justin Trudeau’s government—program spending is projected to hit $291.4 billion, a $40 billion increase from 2014.

What’s more, the federal government’s net debt is forecasted to hit $727.5 billion this year and $759.5 billion in 2017/18.

“Because this federal government seems to be on the road to revisiting the damaging fiscal policies of the 1970s, Canadians should question whether we’re embarking on another transitional period in history that, like Lester Pearson and Pierre Trudeau’s time in office, will lead to years of deficits and ultimately another debt crisis,” Di Matteo said.

The Canadian federation’s 150th anniversary is an important milestone for a country that has become one of the most successful countries in the world. Canada’s economic evolution from a rural agricultural nation to a modern, highly urbanized, service-intensive economy is accompanied by the federal government’s transition from spending mainly on goods to spending on transfers. Indeed, over two thirds of federal spending today is now largely a transfer payment of some type whether to individuals, other governments, or bondholders. The evolution of the federal government from a producer and provider of public goods and services to a cheque-writing agency is a result that would likely astound the nineteenth-century founders of Canada.

Canada’s federal government has grown both in terms of its absolute revenue and expenditure as well as relative to the economy. At the dawn of Confederation, Canada’s federal government had a budget of $14 million, an ex-penditure-to-GDP ratio of approximately 5%, and a net debt of $75.7 million. This resulted in a net ratio of debt to GDP of 20% and annual interest charges of $4.9 million absorbing 29% of spending. By 2017, it is anticipated that total federal government spending will be $331 billion with an expenditure-to-GDP ratio of about 15.6%. The net federal public debt will total $759.5 billion, resulting in a debt-to-GDP ratio of 35.7% and debt service costs of $26.4 billion accounting for 8% of federal expenditure.

Paying for this expenditure changed over time. From 1867 to World War I, the federal government’s revenue was dominated by customs duties, which peaked at 66% of revenue in 1912. The needs of the war effort sparked the search for new revenue, which led to the creation of the first personal and corporate income taxes and the first federal sales tax. Over time, the importance of these three new revenue sources grew and it is anticipated that by 2017 the personal income tax alone will make up 51% of federal government revenue, corporate taxes, 13%, and commodity taxes (GST, excise taxes and customs duties), 17%.

The 150 years since Confederation have witnessed a transition of the federal government from its primary concern with the active economic development of a state grounded in liberal economic principles to an activist role partly aimed at bringing about a more egalitarian state via redistribution. This led to an expansion of the federal gov-ernment’s spending after World War II that, in the absence of more concerted fiscal discipline and given the slow-down in economic growth, ultimately was a factor in the debt crisis of the 1990s.

Prudent government spending is useful: for example, the construction of the transcontinental CPR railway aided by subsidies paid to encourage the building of a risky capital project. However, the same strategy also resulted in over-subsidization of the CPR as well as substantial subsidies to two other, less successful, rail lines. More gov-ernment spending is not always better and that also applies to the use of deficit financing.

Nevertheless, over the period from 1867 to 2017, Canada’s federal government ran a deficit nearly three quarters of the time with the largest deficit-to-GDP ratios during the two world wars and the run up to the debt crisis of the 1990s. The important policy decisions when it comes to spending are when to spend, what to spend it on, how much to spend, and how to pay for the spending. Getting the wrong answer to any of these questions has fiscal implications.

Given the surge in deficit financing at the federal level currently under way in the wake of the 2016 budget, one wonders if the lessons of the 1990s have already been forgotten. While interest rates remain at historic lows, eco-nomic growth is also low, making a case for fiscal prudence given the dynamics of deficits and debt. The progress made in reducing the ratio of federal net debt to GDP below 40% will be largely squandered if we allow debt to once again grow uncontrollably.

More from this study


The views expressed in this opinion article are solely those of their author and are not necessarily either shared or endorsed by Lake Superior News / Lake Superior Media.


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