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Robert Asselin: Don’t become complacent about fiscal policy

Commentary

If this week’s speech from the throne was a chance for the Trudeau government to reaffirm its priorities, the upcoming fall economic statement will serve as a test for some of the core economic and fiscal assumptions from April’s budget that underlay those priorities.

First, expect some changes to the bottom line for the current fiscal year 2021-2022. Higher oil prices will help on the revenue side. Less uptake on emergency programs for individuals and businesses will likely help on the spending side. Budget 2021 had projected 9.3 percent nominal GDP growth in 2021 and 6 percent in 2022. Scotiabank is now forecasting 12.4 percent nominal GDP growth for 2021 and 6.6 percent for 2022.

In addition, the government announced considerable pre-election spending that was not in April’s budget (what is commonly referred as “off-cycle spending”).  These upside and downside developments since April will doubtless cumulatively affect Ottawa’s bottom line. The only question is by how much and in which direction.

Second, a 4.7 percent rise in inflation on a year-over-year basis in October (the largest gain since February 2003), up from 4.4 percent in September, wasn’t in the cards last spring. In its April monetary report, the Bank of Canada forecasted a 2.2 percent rise for Q4. This isn’t unique to Canada. In the U.S., inflation is running at 6 percent year-over-year. There is a robust debate over what is causing inflation and how long it will be with us. Supply chain bottlenecks are often blamed, but it is far to say that central bankers are in a bit of a bind. They will want to see the labour market improve significantly in the near term before raising rates.  

The question is this: will fiscal and monetary policy work against each other? Much of the $140 billion stimulus committed in the last budget is still coming through and another $78 billion in incremental spending was promised in the last election. This is on top of significant liquidity sitting in Canadian chequing accounts. The bottom line is a short-term focus on boosting demand (more short-term government spending combined with record savings) will risk adding more persistent inflationary pressures.  

Where does this leaves us? 

Fiscal complacency is risky: Although money is still relatively cheap (10-year bond yields are below 2 percent, but considerably up from the low of 0.43 percent in August 2020) and markets aren’t overly concerned with the federal government’s fiscal position right now, there is a real risk of fiscal complacency. Economic and fiscal outlooks always look better down the road until they don’t. Nobody expected inflation to rise as quickly as it did. Inflation matters because it raises the costs of borrowing. Once you get over the 2.5 to 3 percent range it is another ballgame. If the pandemic has taught us anything, it’s that the next crisis is always looming. Few could have predicted the tragedy unfolding in British Columbia. Now is not the time to let our guards down.

Beware of increasing structural deficits: Looking at the non-related COVID-19 commitments made in the Liberal Party platform, it is hard not to conclude we are slowly but surely building a bigger structural deficit over time. One can always hope large deficits can be sustained either by higher GDP growth relative to debt financing (r<g) and/or by raising taxes, but it is a bit like rolling the dice and hoping for the best. Post-COVID-19, the Liberal platform commits to adding, on average, $15.6 billion in new spending every year for the next five years.

To be fair, some of the spending (R&D and infrastructure for example) will help on the growth side over time and $28 billion planned in new revenues will offset some of the new expenditures. But big picture, this means that program expenses relative to GDP would rise above 15 percent on a sustained basis for the foreseeable future, a ratio not seen since the 2008 financial crisis and the 1994-1995 budget. This also assumes no further spending increases in subsequent budgets, which is very unlikely. 

The post-pandemic challenge will not be about boosting demand: Instead, it will mostly be about (re)-building the supply side of the economy — namely labour markets, the energy transition and innovation. The post-pandemic world will be one constrained mainly by supply. Just look to labour shortages and aging demographics. The retirement rate is about to explode, and the labour market is going through a tricky transition. Fast-rising sectors won’t generate adequate growth if skilled workers are hard to find. The energy transition won’t happen if we don’t significantly leverage science and technology and make huge innovation bets. Policy makers ought to use every tool in the toolbox to help build our long-term productive capacity.  

We’re now in a different phase of the recovery, with various short-term risks but also big long-term questions. Fiscal policy needs to be calibrated accordingly and should be used wisely.

Shal Marriott: The election is over: Let’s continue to disagree

Commentary

Parliament is back in session, and before it even began parties were already calling for unity. After any election and especially when the result is a minority government, there are familiar refrains of “joining together” to move forward. Erin O’Toole even expelled a senator from caucus last week, citing the need for his party to be on the same page to hold the Trudeau Liberals to account in the House of Commons.

As seemingly sweet as this rhetoric is, the call for unity either within parties or between parties, or even in the public sphere, should make us uncomfortable. To be on the same page or in complete agreeance about legislation or public policy strikes against exactly what democracy and the Westminster system are designed to do: foster debate and disagreement.

It also belies the country’s basic pluralism. In a country as diverse as Canada – one marked by ethnic, religious, socio-economic, and other differences – so-called “political unity” or a “shared vision” is not only improbable, but it’s also undesirable. It invariably means that different voices and perspectives have been marginalized in the name of ridding ourselves the perceived divisiveness of debate and disagreement.

Consider the House of Commons, which is an active space of contestation. There is a reason why the opposition parties and the government literally face off against one another during session. It is not for the petty squabbles which commentators love to get their soundbites from, but rather that Parliament by its nature asks politicians to constantly engage in debate about complicated topics which usually invoke competing principles and values. This ensures different opinions are heard and considered on the most fundamental political questions the government is tasked to address before legislation is ultimately voted on and passed into law.

The House of Commons provides a place where there is meaningful deliberation about what the government ought to do (or not do). Members of Parliament hear and confront the voices of those they disagree with and are asked to consider what they have to say. Whether or not they listen is beside the point. What is significant is how essential these disagreements are to our political system. It is why we elect candidates from different political parties with different values and beliefs.

These differences and disagreements should be celebrated as a strength, not viewed as weakness.

These calls for unity set aside how crucial these fundamental debates are out of a desire to reflect a shared vision. They aspire to a monolithic political community which belies the country’s diversity. Yet we know that a shared vision of the Conservative party, which is fundamentally a coalition of various political ideologies, isn’t fully possible. Just as a shared vision of Parliament, which is comprised of different political parties representing constituencies from across Canada, isn’t achievable. There cannot be meaningful differences or constructive arguments if everyone is expected to fall into line with the same vision of what Canadian politics should look like. Nor is it realistic to expect a vision that encompasses the unique perspectives and positions of the entire public.

These differences and disagreements should be celebrated as a strength, not viewed as weakness. It allows for more perspectives to be heard and considered. It is a sign that our politicians value opposing views, and more importantly that Canadians have opposing views that do not disappear after an election has been called. Disagreements about what is best for a political party and what is best for a government to do should be encouraged, with the hope that ultimately the best arguments will be victorious.

Not only is dissent an important value for the politicians on Parliament Hill, but it is also a crucial part of the broader public sphere. Surely not everyone is watching C-SPAN, but the spirit of these debates is one we should aspire to. The idea of the public sphere as a space of contestation itself goes back to Aristotle and is one of the reasons why democracy as a type of government works. The public sphere fosters, or should foster, constant disagreement about the affairs of political life. We shouldn’t shy away from these discussions or be tempted to forget the relevance of where we disagree in an attempt to have more productive conversations.

In his book The Death of Politics, the author and former presidential speechwriter Peter Wehner argued that the ability to have these kinds of disagreements is a sign of a society’s strength.

“The task of politics is to live peaceably with our differences and for people to find appropriate outlets for their views to be heard and represented,” writes Wehner. “A healthy politics has as its goal not a civic nirvana where we all just get along, but a nation with enough sense of unity and common purpose to accept and overcome our differences – and where deep differences do exist, to debate them with words rather than fists or billy clubs or bullets, in ways that are characterized by intellectual rather than physical conflict.”

Debates are easy to observe during election seasons. Parties hold conventions before the writ drops where they contest planks of their platform. People wear different coloured pins, they vote for different candidates, they might even debate at the bar who they think the next Prime Minister should be. Yet after an election is over, there is a temptation to want to stop disagreeing. To say that for the sake of the party or the country, there needs to be a shared vision of political life moving forward. What these calls obscure is the value of these debates in the first place and why they are important for the country.

Canadians will always disagree about politics. This is a feature of the system we have, not a bug. The goal should not be to agree or to aspire towards a utopian vision of politics where everyone shares the same views. We should hold firm to our beliefs, genuinely hear the opposing positions of others, and continue to have meaningful conversations about the different directions the government should take. Canadians should strive to embrace disagreement, recognizing that it allows us to share different ideas about political life and helps to create a discourse where more voices are able to be heard.