Economic Letter

David Bond is a retired bank economist who lives in Kelowna.

Many of my retired friends, like me, are living on essentially fixed incomes. They have been calling me of late asking what I think will happen in the coming years with all the massive debt that governments — federal, provincial and municipal — have run up in their efforts to deal with the pandemic.

In essence, they are worried about high levels of inflation that might occur as a result of that debt. There is some justification for their concern. In previous periods when government borrowing surged, prices surged as well — after a modest lag. Having contributed to pension funds and other types of investments, my friends are dreading a long-term decline in their standard of living as high inflation would erode the purchasing power of their incomes.

The big question is whether significant inflation is very likely to follow as in the past or will we avert rampant inflation despite this current binge of borrowing.

My answer is that we will probably avoid a major inflationary shock provided that governments at all levels act with courage while maintaining a clear focus on the long-term objective of stable prosperity.

They will, however, probably have to make significant adjustments in how they raise and spend their tax revenues and this is never easy.

First, we have to give up cutting taxes.  Cut taxes and you cut revenue and then you have to eliminate some expenditures.

When the BC Liberal government cut income taxes by 25% during the recession of 2001, provincial revenues were reduced by the $2 billion associated with the cut and also by an additional $2 billion due to a decline in sales tax and other income flowing from the concurrent recession.

Then premier Gordon Campbell was unwilling to admit the tax cut was unwise, so reductions in spending were the only available solution.

Because he had promised he would not cut either health care or education, other departments were forced to produce drastic cuts that even today still reverberate through social services. These cuts especially affected children and single-parent families on welfare. 

It is also worth noting continued high borrowing by governments will eventually impact negatively on their credit ratings, resulting in a higher rate of interest on that borrowing. Reductions in program expenditures would then be required in order to pay the increased interest on the debt.

In this scenario, eventually government sector ends up between a rock and a hard place.

If the pandemic has shown us anything, it is the shabby treatment afforded those in the lowest 15 to 25% of income earners. Folks in this grouping form a large portion of those designated “essential workers;” i.e., cleaners, bus drivers, grocery store staff, care aids and many other workers in non-professional service jobs.

That these workers need a living wage in order for society to function properly and safely should be clear by now.

Unless government does something quickly to expand subsidized child care, the social unrest resulting from the pandemic will be serious indeed. Some of my friends say, “Why should we pay for someone to care for children? When my kids were young, we didn’t have such a thing.”

True, but a half-century ago, a household with one wage-earner made enough to support a family. Wages have not kept pace with the cost of shelter, food, clothing and transportation. Providing subsidized child care that allows a second parent or a lone parent to work fulltime is less expensive, both in the short-term and long-term, than providing welfare and rent subsidies for families who can’t make ends meet.

We have to face facts and overcome anti-tax ideologies to increase the percentage of GDP flowing to governments. Then we can improve our services to low-income working families and to those with mental health issues and other disabilities. If we don’t eliminate poverty and if we fail to care for those among us who are disadvantaged, the prosperity and domestic security of Canada will suffer a never-ending decline.

Let’s make our social safety net stronger and more effective. When every child is fed, clothed and educated to the best of their ability, we will all be better off.

David Bond is a retired bank economist living in Kelowna. His column appears on Tuesdays.