The recent financial update provided by federal Minister of Finance Bill Morneau was certainly a sobering picture of the current status of the federal government’s fiscal position.
The minister expects a record deficit this year of more than $340 billion which will send total outstanding debt to over $1.2 trillion and the ratio of debt to GDP to 49% (compared to 31% in January of this year). While this looks grim, it’s still well short of the all-time high of 68% set back in 1994-95.
The economy is set to shrink by 8.6% this year — though it is forecast to rebound in 2021 by over 5%. Unemployment is expected to decline from a high of 14% to something close to 7% by the end of 2021.
So, while things are certainly gloomy, they are a lot better than what would have been the case had the federal government and the Bank of Canada not stepped in with massive assistance programs. Had they not, the results would have made the Great Depression of 1929-1933, when unemployment reached over 20%, look like a stroll in the park.
While the update provides a snapshot of the current situation at the federal level, it deals only in a passing — and not in a very substantive way — with what lies ahead. Will the deficits continue at a massive level for several years and if so what will that mean? Will the debt-to-GDP ratio continue to rise and why should we be concerned?
Equally important, while the federal debt is now for the first time measured at more than a trillion dollars, it only includes a portion of the nation’s debt. The provinces have seen spending levels rise substantially and, unlike the federal government, they do not have a great deal of flexibility in raising revenue or in borrowing substantial amounts without suffering a downgrade in their credit ratings.
This would mean higher costs for future borrowing. Add to that corporate and personal debt and the total is worrying, as the Bank of Canada has been saying for several years.
For the past decade or more, we have enjoyed substantial reductions in tax rates while at the same time government spending at virtually all levels has continue to rise. While borrowing to finance investment in capital (as households do when taking out a mortgage to buy a house) makes sense, borrowing to finance everyday operating costs (for households, utilities, food and other living expenses such as transportation) is a sure way to go bankrupt. Several provinces have been financing operating costs via borrowing.
Finally, part of the current federal mega-deficit has resulted from the sharp decline in tax revenues in recent years. Personal income tax fell by 30% and business revenue fell by 11%. Will these revenues recover? Yes, but slowly over the next two years; somehow that shortfall will have to be covered.
Finally, two additional challenges require prompt attention. Care facilities for seniors who suffer long-term disabilities such as dementia or Alzheimer’s disease have suffered numerous deaths from the pandemic. That reflects poor operating conditions in many such facilities. The demand for these services will only increase as the baby boomers age and so the costs will continue to grow.
Which jurisdiction, federal or provincial, will ante up? The ultimate funder will be the taxpayer, so senior levels of government need to sort out financing without trying to avoid responsibility.
Finally, those in the bottom 20% of income earners have suffered inordinately from the pandemic, not just with infections, but from loss of income as a result of lockdowns, layoffs and business closures and failures.
The impact upon children in those households should be of particular concern. Children raised in poverty suffer from poor health, poor educational attainment and marginal employment. So a permanent guaranteed income is gaining acceptability. But how to finance it?
We need a thorough review of the tax system at all levels. It has been more than 60 years since this was last done and much has changed. The provincial and federal governments and the major cities should together finance and contribute personnel to staff such an inquiry and it needs to be done now.
David Bond is a retired bank economist who lives in Kelowna.