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By Jason Clemens
and Niels Veldhuis
The Fraser Institute
As we pass the midway mark in the federal government’s mandate, it’s clear that the only guiding principle for fiscal policy is ‘just spend more.’
Spending more, regardless of economic conditions, is not sound policy. It seriously risks the country’s finances and is all too reminiscent of the 1960s and ’70s, which took Canada almost three decades to recover from.
There are generally two approaches to government finances.
The first is rooted in Keynesian economics, named after one of the most influential economists of the 20th century, John Maynard Keynes. The basic idea is to manage the demand side of the economy to smooth out economic fluctuations. In bad times, the government stimulates demand, particularly by consumers, by spending more, lowering tax rates and/or lowering interest rates, and thus (at least theoretically) improves the economy. Conversely, in good times the government reduces spending, increases tax rates, and/or increases interest rates to temper the economy so it doesn’t overheat.
The other approach, often called supply-side economics, argues that government lacks the information and incentives to manage the economy along Keynesian lines. This approach focuses on improving incentives in the economy for savings, investment, entrepreneurship, business development and work effort. The underlying idea is to get the rules of the game and incentives right so individuals, families, entrepreneurs and businesses make better, more productive decisions, which leads to a stronger economy.
The reality of politics is that neither approach is ever implemented or maintained in its pure form. Government policy tends to ebb and flow between these two sets of policies.
For instance, the Liberal government led by Jean Chretien tended more towards improving incentives and the rules of the game by balancing budgets, reducing tax rates and reforming government spending.
The Conservative government led by Stephen Harper had a more mixed record, favouring Keynesian-type policies during the 2009 recession and its immediate aftermath while promoting better rules of the game outside this period.
Neither of these approaches seems to be operative in the current federal government. Instead, there seems to be a drive to simply spend more money. If the economy is weak, Ottawa should spend money. If the economy is strong, Ottawa should spend money.
That’s not a guiding principle for fiscal policy – it’s a path to fiscal calamity.
The Liberals under Prime Minister Justin Trudeau took office in late 2015 and immediately boosted spending by roughly $7.7 billion from the budget plan of the previous government. Less than six months later, in its first full budget (2016), the government proposed to increase spending by $66.3 billion over the four-year period (2016-17 to 2019-20) compared to the 2015 budget. A year later, in its 2017 budget, the government proposed to increase spending by another $10.9 billion over this same four-year period.
Per-person spending (adjusted for inflation) is now at the second highest level in Canadian history, behind only Harper’s spending in 2009 in the depth of a global recession.
Perhaps more telling is the economic update released in October, which introduced more new spending of $17.5 billion between 2017-18 and 2022-23 despite the government’s pronouncement that the economy was improving.
Remember, these spending increases and ensuing deficits are occurring outside a recession. Any economic slowdown, or perhaps even a recession, will place the government’s finances into deeper deficits. That would likely take a decade or more to work out of, meaning the country will accumulate substantial additional debts, further burdening future generations.
As Canadians take stock of the Liberals’ two years in office, consider the lack of a functioning guiding fiscal principle – other than what appears to be a proclivity for evermore spending. And that just puts federal finances in serious peril.
Jason Clemens and Niels Veldhuis are economists with the Fraser Institute.
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