This episode of Hub Dialogues features host Sean Speer in conversation with University of Calgary economist Trevor Tombe on the federal government’s recent fall economic statement. They also touch on some broader economic and fiscal trends including inflation, demographics, and the fiscal sustainability of Canada’s provinces.
You can listen to this episode of Hub Dialogues on Acast, Amazon, Apple, Google, Spotify, or YouTube. A transcript of the episode is available below.
SEAN SPEER: Welcome to Hub Dialogues. I’m your host, Sean Speer, editor-at-large at The Hub. I’m honoured to be joined today by University of Calgary economist Trevor Tombe who has distinguished himself for his public spiritedness and ability to convey complex economic and fiscal matters to a broad audience. We’re lucky to have him today. We’re speaking the evening of November 3rd, hours after the federal government released its fall economic statement.
I asked Trevor to join me to speak about the statement and the numbers that underpin it. Trevor, thanks for joining us at Hub Dialogues and helping us work through today’s fall economic statement.
TREVOR TOMBE: It’s great to be here, Sean. Thanks for having me.
SEAN SPEER: One of my favorite podcasts, Trevor, is Tyler Cowen’s podcast, Conversations with Tyler. A frequent question he asks guests is about what he calls their production function. Let’s just start off by asking you, what do you do when you’re digesting or analyzing a budget? What parts of the budget do you turn your eyes to first? What helps you carry out your evidence-based analysis?
TREVOR TOMBE: That’s a great question because in any fiscal update that we get federally or provincially or anytime we see a government budget document, they are filled with information, with policy and economic analysis, with political statements as well. They are also communications documents, and so there is so much in there. Today’s fall economics statement, for example, is nearly 100 pages long, and the budget earlier this year was well over 300 pages long. And that’s not counting a lot of the technical appendices that are elsewhere on the government website.
What I tend to do with fiscal updates or with budgets is I skip right to the end. I skip past a lot of the framing and the narrative that any government, of course, wants to put in the window and I jump right to the appendices. These are the tables of the economic and the fiscal projections that really contain a lot of the important meat. You can get a lot of insight and information from these tables very quickly. I want to look first at what are the economic conditions that the government is projecting. Often those are informed by various private sector forecasts as well.
What does the economy look like in the coming years? What does unemployment look like? Or particularly important these days, the rate of inflation, what might that look like this year and next, and so on? Then those feed naturally into many of the important budget items: revenue, tax revenues, GST, customs duties, and so on. How do those revenues change from one year to the next, and how do they compare to what we previously thought those revenues would be?
On the spending side, how are major spending items changing? Transfers to individuals, elderly benefits, and child benefits in particular, transfers to provinces. This is something that’s increasingly important. We just saw many of the premiers, for example, come out advocating for increased health transfers. Looking at those numbers, how do they change from one year to the next? How do they compare to where we thought they were? With those tables you can very quickly get not quite a comprehensive, but a very thorough look at what the financial situation of the government is.
SEAN SPEER: I have to ask on behalf of all of your Twitter followers who are so grateful to receive your analysis, not just in the immediate aftermath of a fiscal update or a budget but on a more regular basis, do you have preexisting worksheets that you’re building off of or are you carrying out new incremental analysis every time a government across the country releases some budgetary document?
TREVOR TOMBE: Boy, we’re really getting into the weeds of my production function now, aren’t we? I have a lot of fun with Twitter in trying to visualize data in different ways. Most of what I do actually does build on preexisting code that will either automatically fetch whatever Statistics Canada has put out that day, or I have some prearranged spreadsheets where it’s pretty easy just to pop in a couple numbers and then the figures can very quickly be generated, so there’s not as much work behind each of the figures as it might first appear.
SEAN SPEER: Let’s move on to the fall economic statement in case we risk losing any more of our listeners, but thanks for that insight. There are different ways to go about getting your analysis and perspective on the fall economic statement, but why don’t we carry out our conversation precisely the way that you carried out your own analysis and start with the broader economic conditions in which the fall economic statement was released? Looking at the underlying economics contained in today’s report, what struck you, Trevor?
TREVOR TOMBE: There are two big takeaways, I think, from the economic side of today’s update. First, just economic growth in general and the unemployment rate. There’s a lot of concern here in Canada and in many countries around the world about the potential for recession, either essentially very soon or next year as a result of lots of factors. High energy prices are a drag on some countries’ economic growth rates or high-interest rates that we’re seeing rapidly being increased by central banks around the world. What does the federal government think is in store for Canada’s economy next year?
While they certainly are downgrading their projected growth, they don’t foresee in their main projection a recession. They anticipate that growth will be about 0.7 percent next year. That’s really low and quite a bit lower than the 3.1 percent that they were previously projecting. I guess for perspective, a normal rate of real GDP growth might be around 2 percent. I think there are ways we can think about getting that a little higher, but that would be something in line with normal. So it’s going to be a challenging year, but one that’s not in recession, where it’s not shrinking, it’s just going to be growing very slowly.
The second big takeaway from the economic projections here is of course what’s on everybody’s mind, and that is inflation. What does the federal government believe the inflation rate will be next year and the year after? Of course, inflation is high this year, but here we are in November, so there’s a lot of the year completed already, not a lot of uncertainty here. They think we’re going to have on average this year an inflation rate of just shy of 7 percent and then next year 3.5 percent. That’s still significantly above where we’d like it to be around 2 percent, that Bank of Canada target, but by 2024 they are forecasting a 2.1 percent inflation.
They think that just based on these projections here once we get into 2024 is when inflation might be back to normal. I think both these, economic growth and inflation, are particularly important right now for understanding the financial picture of the government because while inflation really lowers for you and I and individual Canadians how far our dollar can go, inflation does for governments in general, and the federal government in particular, it means more dollars. I think we also saw that reflected in a big way in the financial numbers that we got today.
SEAN SPEER: We’ll come to that. Now, let me just say in parenthesis, I think it is to the credit of the government that as part of their economic analysis and in turn their fiscal projections, they produced a series of scenarios in effect to band from what they described as best case to worst case scenario. It seems to me, according to most literature on economic and fiscal analysis, especially in an era or period of such uncertainty, that is a best practice. It’s something I think the government started in the pandemic, and it’s interesting to see them continue.
I mentioned the subject of revenue. Let’s take that up now. The fall economic statement markedly upgrades its projections for total revenue not just in 2023 but across the fiscal planning period. I guess my two questions for you, Trevor, are why, and in particular in 2023 where I think that the increase in projected revenue is something approaching $30 billion, how common is it in your experience to see such a significant in-year change to the revenue projection?
TREVOR TOMBE: Here I am in Alberta where we do tend to pretty often see large in-year revisions up and down to our revenues for obvious reasons, oil prices and royalty revenues, and so on. For the federal government, it’s actually fairly unusual to see large upward revisions to revenues. You can see large downward revisions when a recession unexpectedly occurs. The fiscal conditions can change rapidly for the negative, but then recoveries are usually more gradual in terms of those revenues. This stood out to me.
I don’t know the full extent of the historical data here, but it’s certainly a larger upward revision than I can think of. We’re seeing that in lots of different areas. Maybe I’ll unpack this a bit more in a moment, but I’ll just note that corporate income taxes, just, for example, have jumped up to levels that we haven’t seen since the late 1960s. There are a number of important components to the budget that have seen really dramatic increases that you potentially have to go back decades to find anything that comes close.
SEAN SPEER: You mentioned in a previous answer the impact inflation can have on revenue. Are you able to discern the relative role that inflation is playing here in explaining this marked increase in the government’s revenue projections?
TREVOR TOMBE: Yes. I think we can get a pretty good handle at how much inflation is affecting revenue. I guess before diving into the numbers, let’s just take a step back, how would inflation affect government revenue as well? First, the GST is a 5 percent charge on the goods and services that we pay, and so when the price goes up, so too will the amount of GST payments go up. Of course, it depends on what goods you buy and so on, but that’s a tax on the value of the product itself. Another way is that, in general, inflation is also going to come with higher prices and higher incomes to individuals if they’re increasing their wage demands as maybe we’re starting to see in certain sectors right now.
That’s going to come with higher personal income tax revenues. There are also implications for corporate income taxes, whereas the nominal value of corporate profits might increase as a result of some of these changes. That also means higher revenue to the government. Overall in a normal year, just with some generic increase in inflation, every one percentage point increase in inflation is roughly $4 billion in additional revenue to the federal government.
That’s a good rule of thumb. Here we are if we’re anticipating 6.8 percent inflation for this year, that’s nearly five percentage points higher than what we would normally see and potentially, therefore, generating about $20 billion in additional revenue to the federal government. That’s just some generic intuition and some good rules of thumb. There are some offsetting factors for the federal government too. Some benefit payments, child benefits, elderly benefits, for example, these are indexed to inflation and they, therefore, grow when inflation is high and which increases expenses to the feds.
There are some offsetting effects here, but the net effective inflation on the budget is strongly positive. Today inflation is importantly driven by lots of factors that are at play for sure, but a very important one is energy prices. When oil prices are high, oil and gas corporate profits are particularly high, as we’re seeing. The feds will get about 15 cents of every additional dollar in profit through the corporate income tax system just because that’s the rate that we have chosen, 15 percent.
It looks like the largest increase in revenue that we see today with the federal government’s budget for this fiscal year is really coming through a big boost in corporate profits. Oil and gas, mining, and petroleum product profits in particular. That’s accounting for largely the $23 billion increase in total corporate income tax revenues to the federal government. That’s really accounting for the bulk of the improvement in their financial situation.
SEAN SPEER: That’s a comprehensive answer. Thanks, Trevor. Do you want to turn the conversation now to the spending side? As you say, there is an interrelationship between the inflation upward pressures on revenue, but then there can be some downward pressures on spending, including the potential rise in debt service charges. Maybe before we get into program spending, because I want to spend a bit of time on that, and I think some interesting analysis that you pointed out today on social media about the trend line of program spending, why don’t we just spend a minute on debt service costs? In a nutshell, help us understand how debt service costs are going up, and how much they’re going up in light of rising interest rates?
TREVOR TOMBE: Sure. Like anyone, borrowing money comes with a cost. For the federal government, their costs are really determined by what their bond yields are. Of course, they don’t walk into a bank and ask for a $30 billion loan. They sell an IOU to a willing buyer that says, “I promise to pay you $X in the future.” If you believe that promise is credible, then a willing buyer is going to be willing to pay just a little bit less than X. That gap between what someone’s willing to pay for that bond and what the bond value is is implicitly an interest rate.
The federal government here, if we look at what it costs them to borrow for 10 years, this year it looks like that’s going to average about 2.8 percent, and that’s going to rise to about 3.1 percent, they figure next year. A lower interest rate than you or I would be able to access typically, but higher rates than they were previously anticipating of only about 2 percent if we go back to what the budget was last year.
We’re having an increase in effectively the cost of borrowing for the federal government, and that’s going to increase the amount that they have to pay to service that debt. It looks like this year the increase in debt charges to the government are just shy of $8 billion, and next year that’s going to grow to be about $10 billion higher than we previously thought. They were of course going to grow because of some of the additional borrowing that we’re doing. These rate changes do have a pretty meaningful effect on the overall government’s budget situation.
SEAN SPEER: I suppose for those listeners who want to contextualize what these increases in debt service costs mean, while it is material, it’s, as I understand it in relative historical terms, still low as a share of overall spending or overall revenue or whatever metric you use to talk about debt service costs. Is that right?
TREVOR TOMBE: Yes. I’d say that is indeed fair, and there are a lot of ways you can look at it. If we go back to the ’90s, roughly one-third of the federal budget was debt service costs alone. It’s night and day compared to where we were there in the middle of the 1990s and a little before then. Right now, it looks like debt service costs for this current fiscal year are going to be a little around 1.2 percent of Canada’s economy rising to about 1.5 percent next year. Or if we want to think about these debt charges as a share of revenue, how much of each dollar of revenue that the federal government gets is being used up in these debt service costs?
Next fiscal year, they’re projecting it’ll be a little over 9 percent, so roughly 9 cents of each dollar brought in by the government will need to be used to service the debt. That’s certainly higher than where we were but lower than these historical highs that we saw a few decades ago. Then gradually over time, these debt charges are projected to decline relative to both the economy and the overall government’s revenue. I’d say that just based on that alone, we shouldn’t have any short-term sustainability concerns for the government. But there still is a lot of uncertainty out there.
If a recession occurs, that’ll just mean larger deficits and higher borrowing, lower future rates of economic growth, or federal policy changes. I think one thing that we’ve seen certainly through the pandemic and that’s fair enough, but even prior to the pandemic, lots of changes to the government’s own expenditure plans really ratcheting up from what they were previously projected to be. I think that’s almost surely going to happen in the coming years as well as we see pressure in several areas for increased say social program spending and also military spending that was not reflected in some of the numbers that we got today.
SEAN SPEER: Just in that vein, if listeners are interested in the point that Trevor raised, I’d encourage them to read Andrew Coyne’s column in response to today’s fall economic statement where he documents that tendency for, as out-years become in-years, the projected program spending number tends to go up substantially, which may be a criticism of the government or it may be a criticism of the budgeting process and the way in which we project out.
I note, for instance, that in the fall economic statement, for the first time in a long time, we have within the fiscal planning period a projected surplus in 2027/2028, which I suspect reporters and others will be drawn to but Lord knows there’s a lot that can happen between now and 2027/2028 that will impact that eventual fiscal outcome. One of the key factors, of course, will be program spending. Before we look ahead, let me just ask you, Trevor, about how to think about program spending and incremental program spending in the context of inflation.
There’s been a lot of demands on the government, including from opposition parties and other voices, to in effect introduce new spending in the name of helping households deal with the impact of inflation. The government has taken some steps over the past several months and indeed in today’s fall economic statement. What’s your sense? Are the steps that the government has announced thus far sufficiently targeted so as to avoid contributing to an overheating of the economy? In effect, has Ottawa found the right balance, or is what it’s doing actually risk making the job of the Bank of Canada more difficult in terms of bringing inflation under control?
TREVOR TOMBE: That’s a tough question. I think there’s a lot there to unpack. When I think about the relationship between inflation and government finances, we’ve talked about the one direction inflation to come in finance, but what about the other? Fiscal policy is an important factor that influences the overall macroeconomy. If I want to think about whether fiscal policy is adding to or subtracting from overall aggregate demand for goods and services, then that’s something that can help me think through whether or not fiscal policy is adding to inflationary pressures or not.
Often, this comes up in the context of whether fiscal policy is “tight or loose”. You recommended listeners check out Andrew Coyne’s column. I’ll recommend they check out your column from I think it was yesterday or earlier this week on whether or not federal fiscal policy is tight or not. When I think about tight versus loose, I think are we raising more revenue as a government than we are spending? I think that’s a very simple go-to definition here. If you’re running a deficit, then the government is adding to the overall demand for goods and services, which increases pressure on prices to rise in general.
We are seeing that the deficit is shrinking. So I guess you could say we are tightening relative to recent years, but still not at the point where I think it’d be fair to say that it’s tight. What about the new measures and whether or not that’s making the Bank of Canada’s job harder? In the fiscal update here, we had just a couple new measures to address affordability challenges that inflation creates, and neither of the big ones there were actually new.
One is doubling the GST credit. That’s one where if you qualify for GST credits, then you’ll notice that your quarterly payment is going to be double what it normally is, and that’ll happen twice. That’s a six-month doubling of the GST credit, and that’s about $2.5 billion. That’s not large relative to Canada’s overall economy. I think another way to think about that $2.5 billion is the additional GST revenue that the federal government is getting from inflation, they don’t actually report it in the update but a good best guess for me is that it’s about $2 billion in additional GST revenue.
They’re taking just a little bit more than the windfall that they’re getting from inflation through GST and then giving that back to lower-income Canadians. I don’t actually have a big concern with that. I think the macroeconomic implications will be fairly minimal and it does provide some direct support to those who are particularly strained by rising prices and our current high rate of inflation. I think that’s okay.
I think the broader question though is to what extent has fiscal policy recently, not just this year—I think many point to fiscal policy as a potential contributing factor to the very inflation that we’re seeing now. There’s going to be something that people research for years, and so it’s really something where I can’t put a firm number on it. The International Monetary Fund, for example, does these regular global economic outlooks and some really good analyses in there. They did their look at the relationship between unexpected changes in inflation relative to their own past projections and the size of government fiscal supports through Covid. At least among advanced economies, not globally, but among advanced economies, they could measure a statistically significant relationship between the two.
It doesn’t fully account for the high rate of inflation that we’re seeing, so it’s not going to get you from 2 to 8, but it’s there. At least this early look at the data suggests it’s a measurable contributing factor. It’s something that’s going to come with a lag as well. Fiscal policy last year or potentially even the year earlier may still be having an effect on the economy today.
Even though right now total spending is even in nominal terms shrinking relative to last year and that’s going to mean that fiscal policy today is not going to further add to inflationary pressure next year or the year after, I think there’s something to be said for fiscal policy, in general, being a factor behind inflation today. Some of the measures that we’re seeing today in response to that high inflation, when I balance, I don’t think are going to add much more to it.
SEAN SPEER: That’s a lot of great insight. I’ll just say in parenthesis it seems to me the broader issue raised will be the subject of debate for a long time. My personal inclination has been in the past several months that in hindsight, we overreached in response to the pandemic and if you were to do it again, you would have adjusted downward the magnitude of support. I was listening to a podcast Ezra Klein had Matt Yglesias on and he said something that stuck with me.
He said something like, “We didn’t know the nature of the COVID challenge and so the over-correction which has contributed to some extent to what we now face was worth the trade-off.” That even knowing that it was probably going to produce inflationary consequences down the road, you would have probably still done it. As you say, I think one of the challenges is I don’t think we fully understand the broader supply context and how all these various things interacted, but as you say, this will be something that no doubt will be the subject of debate for a long time.
TREVOR TOMBE: Yes. People still make careers today examining aspects of the Great Depression. It’s likely to be the case with this shock as large as what COVID was. I guess to that last point that you mentioned, I do think it’s important to remember that hindsight is 20/20. With what we know now, I think it’s fair to say that the fiscal response in many countries could have been smaller. Still provided effective level of support through the pandemic at a lower overall cost.
At the time if I were to dial a clock back to March/April 2020 when we were rolling out some of these policies, there was no credible way we could have known that both our development of the vaccine would be as quick as it was, that the economic recovery through 2021 would be as strong as it was getting back very quickly, and now even exceeding the employment rates that we had prior to the pandemic. Lots of uncertainty at the time. I think on balance, people will differ in their risk, how they evaluate that, but airing on the side of too much is probably where I’d come down.
Monetary policy too, I think it’s quite clear that in retrospect, we should have been tightening earlier. Now we’re seeing some catch-up being played by central banks. Monetary policy is part of the best of times because it comes with this long variable lag, we say. It tends to take about a year and a half, potentially two years to fully affect economic activity. The central bank needs to be thinking, “Where are we two years from now?” Then making decisions based on that.
Through the tail end of 2020, I don’t think there were reasonable or credible expectations that 2021 would have been as strong as it was, and so they were making decisions anticipating a lot more weakness than actually occurred. It’s a mistake in retrospect, but I think not quite right to characterize it as a mistake at the time even though there’ll be lessons learned from this experience.
SEAN SPEER: We’ve talked a bit so far about the extraordinary spike in spending in response to the pandemic, but I think one of the most interesting points of analysis that you’ve identified just in the few hours since the fall economic statement was released is that program spending is going to remain persistently high through the fiscal planning period. By high, I’m not making a normative judgment of how big the government ought to be, but simply that government will remain larger as the share of the economy well after the pandemic than even it did before the pandemic. Do you want to unpack that and maybe even speculate about what you think is behind that?
TREVOR TOMBE: Sure. Happy to. This is one of the ways of looking at the size of government that I find quite useful. It’s not the only way to look at it, but if you look at a government’s program spending as a share of GDP, then what you’re doing is effectively measuring what share of economic activity or what share of goods and services is being accounted for by government programs, loosely speaking. At the peak of the pandemic there in 2020, we had about 28.3 percent of GDP accounted for by program spending and that is, outside of World War II, just way higher than any other year.
SEAN SPEER: Can I just interrupt for one second there, Trevor? That’s because there’s something happening on both the numerator and the denominator in that case, right?
TREVOR TOMBE: Exactly. When the economy shrinks, if government spending doesn’t change, then naturally the ratio of spending to GDP is going to go up. These things can move up and down for reasons that go beyond just policy choices. Actually, that’s a really interesting point. Put a pin in that and then loop back to that in a second. Back to program spending as a share of GDP. This year, it’s looking like we’ll be a little bit above 16 percent of GDP, and that itself is a high number. You have to go back just for a perspective to about 1993 to find a year where you have a comparable level of spending.
Next year, the government’s projecting a bit less than 16 percent, and that brings us to where we were at the peak of the financial crisis when the 2009/2010 stimulus was being rolled out there. Then in the out-years, if we go to the end of the projection by the government, they’re looking at overall program spending that I estimate to be about 14.8 percent of GDP, so it’s come down a lot over this projection horizon. Even that number there, 14.8 percent, is higher than where we were pre-COVID back in the financial crisis.
If you average up all the years between say 2000 and 2019, then you get about 13.5 percent. We’re about a little more than one percentage point higher by 2027 than I want to say normal, than what we typically observed for the two decades prior to COVID. I guess you asked about what might be behind that. There are a couple of key drivers. I think one of these key drivers is just going to become increasingly important over time and that’s elderly benefits: the amount the federal government is spending on old age security, on the guaranteed income supplement, for example.
Last year, we spent just over $60 billion on elderly benefits. By 2027, they’re projecting that to reach almost $100 billion. A pretty large increase in those elderly benefits, and that’s of course because we have an ageing population and more people qualifying for those benefits. By 2027, nearly one-fifth of the entire federal budget will be accounted for by these elderly benefits. That’s up from about the 15 percent or so that we saw prior to COVID or the less than 14 percent in the years prior to the financial crisis. And that’s just going to get larger and larger. That’s an important source of pressure on federal spending.
SEAN SPEER: One thing I’ve been thinking about not just today in response to the fall economic statement, but increasingly in the past several weeks as we’ve heard provincial premiers demand that the federal government increase health transfers. We also hear from international organizations and other countries that Canada increase its defense spending to get something approximating 2 percent of GDP to meet the NATO target. There are growing demands for spending on childcare. Even the short-term resources that the government has earmarked are set to grow over time as that program becomes fully implemented. You’ve mentioned growing demands on elderly benefits because of the ageing demographics.
If we could raise the conversation up a bit, just interested in your reflection on the relationship between our revenue structure and our program spending demands. Do you think, Trevor, there’s a need for, I hate to use this word, but a conversation about whether we’re bringing in sufficient revenue to meet the various demands that we’re imposing on the federal government?
TREVOR TOMBE: You’re right to highlight all of the items that you did. Each of these are big areas of federal spending. Military is one of the larger ministries out there. We also have the elderly benefits and other social programs that are being rolled out for various reasons. Each one of those is going to come with important pros and cons that people can discuss or agree or disagree over. Putting aside the merits of them, the question is are we looking down a future for the federal government where revenues don’t keep pace with expenditure growth?
Based on current policy, of course, governments can change spending decisions in the future, but what we have in place right now, we’re going to be having rising spending on elderly benefits just because if you qualify, then you receive those benefits. The federal government, just because of its revenue structure, it raises so much from revenue sources that are tied to income and consumption. The overwhelming majority of federal revenues come from taxes on income and consumption, and those tend to grow with the overall economy.
If you project out beyond the six years of this current fiscal update and you try and estimate where might the economy grow over time, you look at demographic projections to estimate where elderly benefit payments might go over time, then the federal government’s actually in a pretty strong position fiscally such that revenues over the very long term are projected to systematically grow faster than revenues.
What does that mean for federal debt, for example? We can project out 2040 to 2015, it looks like within that 30-year time horizon, you might have overall federal net debt levels reach zero, just to give you a sense of how much faster revenues are going to grow relative to overall program spending based on current policy. The story is very, very different for provinces. They’re much more heavily exposed to spending pressures from an ageing population, way more than the federal government because health costs, based on how we currently structure the system, will grow with ageing because of the frequency and complexity, and therefore the cost of health-care services rises rapidly as individuals age.
We might as a country be looking at increased provincial health spending between now and the early 2040s that’s on the order of about 2 percent to 3 percent of GDP which is equivalent to—each point on the GST is about one-third of 1 percent, and so we’re looking at health pressures that are somewhere between 6 to 10, say, points on the GST just from provincial health expenditure pressures alone. The feds are not exposed to that, provinces are. That’s where I think the health transfer conversation needs to go.
If the federal government doesn’t need as much of the fiscal space that it has at its disposal, then some might point to transferring some of the tax room to provinces. Like the feds would lower their tax rates and the provinces would increase theirs by the same amount structured to keep a taxpayer unaffected to the extent possible, but shifting revenue to provinces, or the premiers are pointing to the cash transfer, the Canada Health Transfer, and they want that to grow a little faster. Various parties in each of the last few elections have raised proposals for the Canada Health Transfer, so it’s a very live issue.
The Bloc Québécois, for example, suggesting that health transfers be allocated as a function of elderly populations rather than total provincial populations, or the Conservatives in the last election calling for 6 percent per year growth in health transfers for, if I’m not mistaken, I believe a decade is what they were proposing. That’s one way of transferring financial resources from the federal government to provinces, just literally through cash transfers. Historically in Canada, federal-provincial transfers change, sometimes dramatically as economic and, in this case, demographic pressures change.
Our current system is not really well set up to handle the pretty large demographic change that’s coming, and so I think we need more than a conversation around what we do. We’ve been experiencing the pressures from an ageing population now for almost a decade. The baby boomers, it’s not like they will be retiring, they have been now for many years. I think we need to do a serious look at these transfer arrangements, but also at health care itself. This is far beyond my area of expertise, but I think it’s pretty clear that the current system as it’s just structured right now is under some intense strain.
I think we need to have a better conversation around health-care policy in Canada. Historically, at least my own personal observation is that when this topic comes up, reform is not really ever entertained because it’s seen as a sacred cow if you will. Any proposal immediately jumps to the Americanization of Canadian health care, when I think there’s an important need for reform there just in order for us to rise to this demographic challenge that is currently happening. And then structuring that along with changes and how we finance it. I think that’s what the longer-term solution needs to look like.
SEAN SPEER: I’ll just say two things in response to that comprehensive answer. First, on health care. To your point, people are often surprised to discover that when you think about our hybrid insurance model, it’s not necessarily all that conceptually different than the United States. It’s really about deciding what’s within public insurance, the generosity of public insurance, and so on. One could see a scenario where actually you could produce a better system, a more egalitarian system, and still be able to deliver the underlying principle of universality, which I think people are rightly committed to.
Secondly, on the bigger question of fiscal federalism, it seems to me you’ve just volunteered for the job of carrying out a Rowell–Sirois Commission for the 21st century. As part of that, it’d be interesting, Trevor, not just to think about the relative fiscal capacity of the different orders of government, but also the optimal level for different forms of taxation. I’ve seen some analysis, for instance, that there’s a strong case that corporate tax ought to be imposed at the national level and sales and consumption taxes at the subnational level.
If we were able to open this conversation up, it could move in a whole host of different directions that could produce more efficient outcomes, but also, as you say, ones that ensure that the different orders of government have adequate resources to discharge the responsibilities that we’re asking of them. We’ll talk about your future as the chair of a 21st Century Rowell–Sirois Commission another time.
Let’s just wrap up. You’ve been so generous with your time. It’s approaching 9:00 PM Eastern. I just want to thank you for doing this public service. Is there anything I haven’t asked you or any final observations or comments you want to make about today’s fall economic statement, and perhaps what it may tell us about the government’s thinking as we approach a winter or spring 2023 budget?
TREVOR TOMBE: You did note earlier on in our conversation that the government did some scenario analysis here in the fall statement. I think that is important not just as an exercise for government to do but is important for Canadians to think about as well. We’re in a time of pretty high uncertainty. It’s hard to know what’s in store next year. Economists are famously poor at predicting recessions. Sometimes even when we’re in one, it’s hard to tell, just as an aside, but these scenario analyses do highlight what are the consequences of these unexpected shocks.
At least the numbers that the government put out here in their scenario where we do end up in more difficult economic times or recession next year leads to a very different trajectory of finances for the government. That’s also something that I think we need to think more about, not just in terms of government finances but in terms of lots of aspects of our own lives, but economic life in general, that how do we think about policy in a way that’s resilient to unexpected shocks? Planning for those shocks is part of it. In order to do that, you need to do these scenario analyses, but I think there’s a lot more we can do to better prepare ourselves to be ready for these unexpected shocks to come.
That’s a lesson beyond just the federal government. I think a lot of provincial governments as well. Maybe I’ll loop it back here to Alberta. In this update today, we had the federal government projecting oil prices remaining above $80 a barrel for years to come for the foreseeable future. That’s going to create just enormous revenues for the government of Alberta, but risky revenues that could evaporate in a moment. We also need here in Alberta and provincially to think about incorporating resilience in the face of uncertainty more explicitly in our fiscal and economic planning.
SEAN SPEER: That’s wise counsel and this has been a wise conversation. Trevor Tombe, thank you for joining us at Hub Dialogues.
TREVOR TOMBE: My pleasure. Thank you.
