Like The Hub?
Join our community.
Join

Trevor Tombe: Is Ottawa strapped for cash?

Commentary

There’s a difficult fiscal negotiation underway between Canada’s various governments. And there may not be much room for maneuver. 

“We’re very aware of the uncertainty in the global economy right now,” federal Finance Minister Chrystia Freeland said last week following a meeting with her provincial counterparts. 

“At the federal level, this is a time of real fiscal constraint.”

She’s right. And that matters for all Canadians.

Provinces and territories want additional federal dollars for health care, and premiers are meeting with the prime minister today to demand exactly that.”

But as the finance minister correctly noted, there are limits to what the federal government can do, especially with rising interest rates and slowing economic growth.

To see this, imagine grouping federal program spending this year into just three buckets:

  1. Transfers to elderly individuals and families with children: $94 billion
  2. Major transfers to provinces and territories: $88 billion
  3. Everything else: $256 billion

It turns out, planned growth in federal spending is constrained to just the first and second buckets.

Elderly benefits are set to grow 7 percent per year between now and 2027. Child benefits grow by nearly 4 percent per year. And major transfers to provinces and territories grow at 5 percent. 

And of the major transfers, funding for health systems is the largest: roughly $45 billion per year, which will increase to nearly $59 billion by 2027—that’s an average annual growth rate of over 5.3 percent. 

Outside of these two buckets, total federal spending is currently slated to fall. And that’s in nominal terms. Adjusted for inflation and population growth, this bucket of federal spending will be nearly 17 percent lower in 2027 than it was in 2022. That’s significant.

Of course, that’s just the latest plan. And as others like Andrew Coyne regularly point out, the federal government consistently overshoots its own spending plans.

If this third bucket of federal spending instead grows at 2 percent per year, which will barely keep pace with future inflation, then total federal program spending would grow by an average of 3.5 percent per year over the next five years. And if the third bucket of spending grows at 3 percent, then total federal spending would grow at over 4 percent.

These growth rates are large—and potentially unsustainable.

To illustrate, I estimate that if interest rates, program spending growth, total revenue growth, and Canada’s economy all grow at 3.5 percent per year,Economic growth here refers to nominal growth. This rate would be roughly 1.5 percent real GDP growth, which may be optimistic in the short term. then federal debt will increase to over 43 percent of GDP—higher than its current value of around 42 percent and much higher than the planned 37 percent.All calculations in this article are based on the Finances of the Nation Debt Sustainability Simulator. This was recently extended to allow alternative federal budget assumptions from 2022/23 onwards. Errors are my own.

Beyond 2027, federal finances become increasingly unsustainable at these rates as public debt continues to grow faster than the economy. I estimate a tax increase equivalent to increasing the GST from 5 percent to 6 percent would be required to stabilize things.

Canada’s finances are on a knife’s edge, leaving little room for provinces.

If health transfers grow just two percentage points faster than planned as a result of any deal—far less than provinces are asking for, but roughly aligned with what the Conservative Party proposed in the 2021 election—then total federal program spending growth increases by between 0.2 and 0.3 percentage points per year.

That may not sound like much, but it adds up quickly. 

If interest rates, economic growth, revenue growth, and initial program spending growth are all 3.5 percent, then a boost in health transfers of this amount increases federal debt to 44 percent of GDP by 2027 and over 50 percent by the mid-2030s. 

Add in a decline in global economic growth, and the consequent reduction in Canadian growth and federal revenues, and the picture becomes even more difficult.

At 3 percent growth, for example, federal debt would be 46 percent of GDP by 2027—higher than any point since 2020/21 when the pandemic disruptions and government support measures were at their highest.

To be sustainable without increasing taxes, spending must fall. But if we’re not going to touch benefits to the elderly or to families with children (which no party seems interested in doing), then increased transfers to provinces must significantly crowd out all other spending.

And to achieve the government’s debt reduction plan of 37 percent of GDP by 2027 then all other federal spending would need to fall by 25 percent (roughly 5 percent per year).

That’s a bleak scenario. But even if economic growth doesn’t slow so much, and if interest rates ease, federal spending constraints remain tight. With 3 percent borrowing rates and economic growth of 3.7 percent, for example, the third bucket of spending still needs to shrink by over 10 percent by 2027 to achieve the government’s debt target if health transfers are modestly increased.A freeze in all other spending would result in a 40 debt-to-GDP ratio in 2027 in this scenario.

Not all is fiscal doom and gloom. Over the long haul, federal finances remain fundamentally sound. But in the short term, there are only tough choices.

Pandemic pressures combined with population aging have brought many provincial health systems to the edge. But there is only so much the federal government can do to help. 

Provinces will have to make most of the tough choices themselves.

Howard Anglin: The contrarian temptation

Commentary

I am a natural contrarian. If you tell me something, my first instinct is to try to figure out why what you said is wrong, of limited application, or an incomplete account of the matter. I hasten to add that this response is usually left unexpressed—a basic courtesy I learned later than most, but did eventually take to heart. 

But lately I’ve been trying very hard to be contrarian about my contrarianism. Perhaps it’s because I see, with apologies to Mr. Ginsberg and some allowance for literary hyperbole, the best (or at least some of the most interesting) minds of my generation destroyed by madness, dragging themselves through the online streets at dawn looking for an angry fix. Twitter is especially tempting for contrarians—the rapid escalation of hot takes leaves mere curmudgeons sounding banal, almost emollient by comparison. 

The internet encourages extreme cases, but contrarian inflation is nothing new. There seems to be a temptation inherent in contrarianism that, if indulged, can produce a mental inversion that leaves you at odds not just with your society but with reality itself. Anyone whose job involves attracting attention can fall prey to this weakness, which is the only way of explaining a certain genre of opinion piece, which sets out to disprove common sense and ends up proving the author’s foolishness. Perhaps it also accounts for curious cases like Michael Coren, Canada’s Vicar of Bray, who can effect a complete reversal of creed with any discernable diminution in confidence or zeal. 

One of the most remarkable examples of the contrarian temptation in my lifetime is the squandered career of Joseph Sobran. Sobran began as a prodigy of conservative journalism. A protégé of Bill Buckley, he was an undeniable polemical—and, indeed, literary—talent. Buckley once devoted an entire edition of National Review to one of his long-form essays called “Pensées” (a title Sobran reportedly hated). Ferociously orthodox in an age of experimentation, Sobran delighted in savaging the vacuities of his Boomer contemporaries, from the New Age philosophies of the 1970s to the neoliberal conformity of the 1980s and 1990s. 

A virtuoso contrarian at a time when America badly needed to be slapped out of its trippy revolutionary reverie, the signs of his eventual crack up were clear by the time he offered his pen to the Oxfordian cause. (The denial of Shakespeare’s authorship against overwhelming evidence is often a good sign that a contrarian has slipped the leash of sense.) After his relatively benign foray into the authorship question, Sobran began dipping his toe in hotter water. 

In 1992, his boss and whilom friend felt compelled to address his increasingly lurid obsession with Zionism. In In Search of Antisemitism, Buckley concluded, unconvincingly, that Sobran’s columns in a small Catholic journal were at least “contextually anti-Semitic.” If there were any doubt, Sobran soon shrugged off his contextual cover. Within a few years he was addressing Holocaust denialist conferences, the ultimate perversion of the contrarian impulse.

Sobran is a contrarian cautionary tale. Most of us (thank God) don’t end up at his extremes—most probably don’t even start out as extreme as he did—but the gradual detachment from reality can take less virulent, though still disorienting, forms. The process is something like what I’ve seen described as the “libertarian to fascist pipeline” (though being neither a libertarian nor a fascist, I can’t comment on the validity of the theory). As far as I understand it (and to summarize crudely), the idea is that people with extreme and unpopular ideas of one kind are susceptible to extreme and unpopular ideas of other kinds. 

The thesis is too simplistic. It’s just as likely that a certain type of dissocialized person drifts from one ideology to another seeking meaning and belonging, more interested in the form of belief than its content. But there is something to it. It does seem that you can get so used to being on the other side of common opinion that it weakens your ability to differentiate between being right and in the minority and believing that you are right because you are in the minority. The fact that almost everything you read and everyone you talk to tells you that you’re crazy ceases to give you pause—worse, it confirms that you are on the right path.

This is a particular vulnerability for contrarians at a time when mainstream elite opinion has shifted so far, so quickly, on so many topics that some degree of contrarianism is practically a precondition for maintaining your sanity. Reading the news headlines as they pop up on your phone, you could be forgiven for thinking that our expert class has passed en masse through the intellectual looking glass. If Twitter has done one undeniably good thing, it is exposing the general shallowness of a lot of people who are expert in one specialized field. Outside their niche, it turns out that even (especially?) very smart people are susceptible to political fashion and hold a lot of unexamined, low-information opinions. But accustomed to the assurance of expertise, they hold them with blithe ultracrepidarian confidence.

So many experts being wrong—publicly, repeatedly, stubbornly, and infuriatingly—is a contrarian trap. Reasoned opposition to mainstream elite opinion can easily morph into reflexive opposition, and from there into blind opposition. One day you are standing up for the benefits of the nuclear family and defending the importance of cultural tradition and the next you are proclaiming that you are “at peace with” a 21st century led by the Chinese Communist Party and burnishing the silver lining of a genocidal regime. We also saw this during the recent pandemic, when some people began by raising reasonable questions about public restrictions and vaccinations and ended up in a fever dream of ALL CAPS TWEETS ABOUT NUREMBERG TRIALS.

Contrarianism isn’t for everyone. A generous and broad-minded skepticism is a healthy way to approach the world, and a stubborn refusal to heed the “importunate chink” of the “insects of the hour” is probably necessary to survive the inanities of social media. But contrarianism is not for the faint of heart or mind. If you are not careful, you can end up falling prey to delusions that are different in their specifics but similar in kind to those of the people you set out to oppose. Refusing to follow the herd, you can end up a stampeding herd of one.