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Rudyard Griffiths: Deficits used to matter. Now the parties don’t even tell us the price tag

Commentary

The Hub started the federal election with a clarion call for more and serious debate of the competing policy visions of the country’s major parties.

At today’s halfway mark in the campaign it’s fair to say our team of journalists and much of the country is “policied out”; deluged by a daily stream of announcements covering every aspect of Canadian life from healthcare to the environment to housing to a deep dive by the Conservative Party into the policy minutia of puppy mills.

What more could a bunch of policy wonks like us really ask for?

While we salute the parties for their focus on policy in the election’s opening weeks, there is a concerning dynamic at work when it comes to the substance of the policy pronouncements. Covering the campaign from a policy perspective daily at The Hub feels like stumbling down Las Vegas Boulevard while being accosted by casino barkers trying to lure you inside with promises of untold riches waiting for you at their craps tables.

This we know: the election has become an absolute frenzy of big ticket campaign promises by all the parties. Even more concerning is that this has been a No Numbers Campaign, with less than half of the Liberal promises having a price tag attached and only a handful of the Conservative and NDP pledges coming with a dollar amount. And even more concerning than that is no one seems to have noticed. In a decade, we’ve gone from the parties competing over fiscal responsibility, to assuming a breezy nonchalance about deficits, to not even bothering to tell us how much these promises cost.

The cross-party consensus on massive, indefinite government spending is like nothing we have seen in the modern political era.

This strikes us as odd given a recent Hub poll showing fully half of Canadians think the country has “spent too much” during the pandemic and that “debt and deficits” rank in the top four election issues. Voters aren’t stupid. They know the country is courting serious risks when its combined debt (government, non-financial corporations and individuals) stands at a truly obscene 352 percent of GDP, second only to Japan and ahead of Greece. As I have written previously, the rate of Canada’s pandemic related debt binge is quite simply off the charts with our combined debt to GDP surging over 80 percent in 2020, the single largest increase of any advanced economy in the world.

So why this cognitive disconnect between our political classes’ seemingly endless appetite for spending versus voters’ justified concerns about Canada becoming, during the pandemic, one of the most indebted countries in the world?

Part of blame lies with the campaigns themselves and the “small beer” approach to electioneering that has come to typify our politics. Instead of giving voters an idea of their first principles and where they want to lead the country (think the iconic 1988 campaign), the leaders are relentlessly micro targeting specific demographic groups with “boutique” policies and spending pledges.

It’s an algorithmic style of campaigning, overly reliant on the social media platforms, that, like a Google search word auction, encourages a bidding war for sincerity and intent. Case in point, the silly profligacy of the parties’ bidding war over who would spend more to help Canadians become homeowners.

The Conservatives opened the auction for votes with a pledge to create one million news homes, introduce the now de rigueur tax on foreign buyers, increase the limit on mortgage insurance and create an “adjusted” stress test for the self-employed (the latter policies being likely to stoke home prices).

The NDP followed up by chucking the proverbial kitchen sink at housing with 30 year mortgages, billions to build hundreds of thousands of low income units and more. Late to the bidding war for the housing vote, the Liberals countered with a $4 billion pledge to construct a 100,000  “middle class” homes (what exactly is a middle class home?) and $600 million to convert empty office space into housing.

In total, billions upon billions pledged to address an issue caused by the one variable none of the parties’ policies or platforms mention: rock bottom interest rates fueling one of the largest mortgage debt booms in Canadian history.

This sea-change in our political classes’ attitudes about debt and deficits is about more than crass campaign tactics. Something profound broke down in Ottawa’s institutional culture during the first phase of the pandemic. The point of rupture was the explicit removal of an implicit fiscal check on federal spending by the Bank of Canada.

The Liberal government was told, in no uncertain terms by then Governor Stephen Poloz, that their pandemic response should not be range-bound by an inability to sell massive amounts of new government debt to investors at low interest rates. All the record excess debt that Ottawa needed to issue during the pandemic to fund its COVID response would be purchased using dollars printed by the central bank. And, so it was, on a truly epic scale with the Bank of Canada almost quadrupling the federal debt to its balance sheet since early 2020 to some 300 billion dollars.

Our political leaders also aren’t stupid. They and their counterparts in the world’s advanced economies have caught on to the new and exciting political possibilities of governing unbound by traditional financing requirements (e.g. floating interest rates and debt appetite set by the international bond market). Why make unpopular spending decisions, giving succor to your political opponents, when your profligacy can be funded domestically by the balance sheet of your own central bank using money created out of thin air?  

This new fiscal reality engendered by the pandemic has been huge boon for centre-left parties. Borrowing costs, specifically the threat of higher interest rates brought about by increased government spending, are no longer a millstone around the neck of progressive political agendas. Tens of billions for healthcare, income supports, or a green “new deal” are all possible when the cost of servicing government debt is permanently suppressed by central banks who have declared their willingness to purchase unlimited quantities of government bonds indefinitely. Given this powerful monetary competitive advantage enjoyed by the centre-left, it should come as no surprise that conservative parties and leaders are foreswearing any debt hawkishness in favor of inventing their own mode of profligacy, usually a fiscally toxic combination of tax cuts and deficit spending.

The key insight here is central bank balance sheets have become a new rentable economic and electoral resource for our political class. Lackluster growth, high debt levels, and voters’ persistent “affordability” anxieties can all be conveniently masked by engineered ultra-low interest rates and surging government spending funded by debt paid for by central banks printing money to purchase said debt. 

If this all sounds too good to be true, a kind of magical money tree showering its largess on the country indefinitely, it most definitely is. Venturing when and how Canada’s economic and political experiment with modern monetary theory will end is anyone’s guess. As a relatively small economy with low levels of productivity and an over reliance on a highly indebted housing sector for economic growth, our financial “end game” will likely feature some combination of currency devaluation (importing an inflationary surge) and a violent reset of asset prices by a new exogenous shock (think a Chinese invasion of Taiwan). The truism that there are no free lunches in economics certainly includes the type of radical monetary and fiscal experiment we are currently conducting.

Before this denouement reveals itself, it would be unwise to underestimate how long or how far our political class will try and “rent” the central bank’s balance sheet for the purposes of massively expanding the role of government in society. The reality is the rest of Canada (corporations and individuals) are also hugely indebted.

The moment the Bank of Canada shies from purchasing a significant portion of Ottawa’s debt issuance borrowing costs will rise for the rest of the economy including corporations, mortgages, car loans, credit cards, etc. And, given how indebted we all are (i.e. the second highest combined debt as a percentage of GDP globally) the effect of even a modest rise in rates could be a painful recession as sky high asset prices (including housing) are repriced to reflect higher borrowing costs. 

We are truly in a debt trap of our own making and our political class, with its hands firmly around the public purse, is in the proverbial cat bird’s seat. The deluge of multi-billion dollar campaign promises that has come to typify the federal election, underpinned by a remarkable cross-partisan consensus on continued deficit spending, maybe just be a taste of a near future where our politics drives not just the nation’s fiscal framework but its monetary policy too.

As we all try and figure out this new economic reality and its risks for the country, it’s worth remembering that the last time our political class enjoyed a similar level of control over the commanding heights of the economy was the period leading to The Roaring Twenties. And, we all know what happened next.

For a sweet, fresh and vibrant wine, keep an eye out for Donnafugata Passito Ben Rye

Commentary

They say that Italy stretches from the Alps to Africa, and the island of Pantelleria lies closer to that continent than Sicily, though it is administrated by the latter.

I couldn’t see Tunisia from its west coast, when I visited Pantelleria in the spring of 2019, but I could see the influence of the Arabs who ruled the island from AD 700 to 1123. That influence is most obviously manifested in Pantelleria’s architecture; the white washed houses, called dammusi, are adorned with at least one dome on every roof, which serves to collect dew and rain and funnel the precious fresh water into a cistern.

The Islamic architecture serves to remind visitors that they are closer to the Sahara than the green rolling hills of Tuscany. A more subtle reminder of Pantelleria’s Arab past is manifested in the grapes that grow on its windswept soils, called locally Zibibbo, from the Arabic for ‘raisin’, and more generally known as Muscat of Alexandria.

My local green grocer sometimes stocks Muscat grapes and they always grab my attention. The berries on the clusters are big, like green ping-pong balls. The Arabs prized them for their sweetness, and spread them westwards across their Mediterranean conquests. They, and their winemaking successors on Pantelleria, also prized them for their ability to withstand hot and dry climates and retain acidity when fresh, or even when dried into raisins, or ‘sultanas.’ Muscat grapes, and the wines made from them, are a dominant export item from the island, along with capers and olive oil.

Pantelleria is a small Volcanic island of about 80 kilometres squared that lies on a continental rift between the African and Eurasian tectonic plates. It’s essentially a volcano with a large caldron in the middle. It became an island after two big eruptions; one that happened about 100,000 years ago and another about 40,000 years ago.

In geological terms, this makes Pantelleria very young. Antonio Rallo, who guided me and a delegation of international wine journalists around the island in May of 2019, attributes an energy he feels when on the island to its geological youth. Rallo, and his sister Josè are the public faces of their family’s Sicilian winery, Donnafugata. I went to Pantelleria as a guest of the Assovini Sicilia consortium of wine producers, and Rallo was a natural choice as tour guide. The Rallo family of Marsala has roots in the Sicilian wine industry that go back to the 19th century, and were the first winery to ‘import’ wines from Pantelleria to the main island and beyond.

On Pantelleria, the Rallo family grow Zibibbo grapes at their Donnafugata Khamma estate and winery. They make wine from them, and from grapes from other parcels of land they own, or fruit they buy from other growers. The Zibibbo grapes I saw at Khamma, like all the other ones I saw on the island, grow untrained as tree-like shrubs. They are low to the ground. In fact, all the plants in Pantelleria, including the shrubs that grow olives, are low to the ground, unless they are enclosed by high walls. This is because there is almost always a strong wind blowing on the island and the height of any plant is limited to the extent it can find shelter from the wind.

Pantelleria is hilly, and the Donnafugata vineyards are terraced by over 40 kilometres of dark grey dry volcanic stone walls. Antonio Rallo explained that the maintenance of the dry walls, which are prone to erode, is a bane on the existence of the vineyard, as the number of Panteschi who know how to build them diminishes. Emigration from the island to Sicily or peninsular Italy is steady, Rallo also explained. As young people decide to leave their family farms, Donnafugata has increased its holdings on the island to ensure a steady supply of Zibibbo grapes for their wines.

At Khamma, Donnafugata makes a naturally sweet white wine, Kabir, but their most famous wine, and the most famous wine of Pantelleria is the Passito Ben Ryé. (Ben Ryé means ‘son of the wind’ in Arabic.) To make the passito, Zibibbo grapes are dried in sunlight, concentrating their sugars before being pressed to make a dessert wine. The dried grapes are manually de-stemmed and added to wine being made from fresh Zibibbo grapes. The ratio of fresh to dried grapes used depends on the characteristics of the vintage, and the balance of sugar and acidity in both forms of the grape that year.

The Donnafugata  Passito Ben Rye is typically both very sweet and fresh and vibrant. Typical fruit notes range from orange and citrus through peaches and apricot. In a masterclass on sweet wines I attended on another trip to Sicily, the Ben Rye was easily voted the favourite of the wine trade attendees by a show of hands.

A limited allotment of Ben Ryé is sent to Canada every year, where it is distributed around the country by the Montréal wine and spirits importer, Univins. I’ll be keeping my eye out for when it comes back, and until then in my mind I’ll be going to Pantelleria.