In the run-up to the federal budget, Canada’s deficit hawks are circling again.
Last week, the Globe and Mail and the National Post gave prominent coverage to a report from the C.D. Howe Institute’s Fiscal and Tax Working Group. The report sounded the alarm over high and mounting government deficits even as the pandemic and high unemployment remain very much with us.
The Working Group is chaired by John Manley, former federal minister of finance and former head of the Canadian Business Council representing Canada’s top CEOs and Janice MacKinnon, a former minister of finance in Saskatchewan. It includes several former federal government senior officials.
The report called for restricting deficits to urgent and temporary measures such as mass vaccination, and support for business investment. It deplored the somewhat ambitious spending promises made by the Trudeau government in the recent Economic and Fiscal Update.
It’s reasonable to assume that at some level, the report reflects the views of corporate Canada and the Department of Finance, and is likely to be taken more seriously than it should be by Minister of Finance Chrystia Freeland.
That is especially frustrating when the report leaves what measures it considers to be both needed and “temporary” largely undefined. It would not seem to include many initiatives that are widely seen to be absolutely necessary based on lessons learned from the pandemic, such as increased funding and infrastructure for public health, radical reform of long term care for seniors, filling in the huge gaps of coverage in our income support programs, or shifting to a clean economy. In all of these areas initial investment, via deficit spending in the short and medium term, would leverage long-term social and economic success.
Unsurprisingly, CD Howe’s Fiscal and Tax Working Group has not a word to say about progressive taxation to fund programs to fill in these holes.
Their argument rests solely on the assumption of the group that low interest rates are not here to stay: “Inflation and higher interest rates may return sooner than generally assumed.”
Rather inconveniently for our fiscal hawks, last week also saw the publication of an article by Gita Gopinath, the head of the research department of the Washington-based International Monetary Fund.
Ms. Gopinath states baldly that inflation is “nothing to be concerned about.” Inflation at low, well below target rates “is expected to allow for continued low interest rates and government spending to support growth, especially in advanced economies.”
The article judges that newly elected President Biden’s huge stimulus package will not push up inflation in the US significantly. It could be added that fast rising government debt in the European Union and Japan is equally unlikely to lead to higher inflation.
It is hard to see why bondholders might not buy Canadian government bonds if inflation is low (as it is), if Canadian public debt is relatively low as a share of the economy (as it is), and if the United States and other major economies are running large deficits.
Ms. Gopinath reasons that inflation and interest rates will remain low since there is a lot of global over-capacity, ongoing automation and technological change is pushing down prices, and many large companies have very high profits which means that they can absorb higher costs without raising prices.
The message to our deficit hawks is this: Take a Valium.
Andrew Jackson is Senior Policy Advisor to the Broadbent Institute