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Trevor Tombe: Lessons for Canada from the U.S. credit downgrade

Commentary

Earlier this month, Fitch downgraded the United States’ long-term credit rating from AAA to AA+. This was not just because of the large and growing federal deficit but also “a steady deterioration in standards of governance.” Regular fights over the debt limit are evidence enough of that.

There are lessons here for Canada.

Before getting to those, though, it’s important to appreciate the troubling scale of U.S. fiscal challenges. 

Fitch expects the government deficit there to reach 6.3 percent of GDP this year. For context, that would be more than $180 billion for Canada’s federal government—4.5 times what we anticipate for this year.

Such public borrowing—especially during a period of strong economic performance—is not sustainable. And long-term projections paint an even bleaker picture.

The latest estimates from the U.S. Congressional Budget Office (CBO) project federal debt to reach 181 percent of GDP by the early 2050s—the highest ever, by far. In Canadian terms, that would be well over $5 trillion today. 

Something must give. And soon.

Recent research suggests immediate and permanent spending cuts or tax increases equal to 3.1 percent of the U.S. economy are needed to stabilize the U.S. federal debt. That’s massive. In Canada, that would be like tripling the GST. And the longer adjustments are delayed, the harder it will be to fix the budget.

Why does this all matter? Rising debt obviously means more interest payments, which crowds out other priorities. But massive public borrowing affects more than just government finances.

Most significantly, it can weaken the economy by reducing private investment. The CBO estimates that each dollar borrowed cuts private investment by 33 cents, slowing growth and productivity. Higher interest rates are also a strain on individuals, who face higher mortgage rates and other borrowing costs.

Canada is in a better position but should learn from the U.S. experience.

First, while our budget process is cleaner than the American’s (if a budget bill fails, Canadians go to the polls to break the logjam), we could do better. Governments should make financial decisions and stick with them beyond one year.

In recent years, the federal government has consistently increased spending above its own previous plans. 

Had total federal program spending this year remained at the level originally planned as recently as Budget 2019, for example, then our more than $40 billion deficit would be a nearly $40 billion surplus.

This isn’t just due to COVID-19. Spending in 2019, for example, was nearly $9 billion higher than originally planned. This has been a consistent pattern that predates the pandemic, though it has grown larger since.

This doesn’t mean that the government can’t spend more. But a prudent and sustainable way to do that is by levying taxes to cover the costs and seeking public support to do so. 

Regularly running deficits during times of strong economic performance and full employment is generally unwise. Such periods are the opportune moments for governments to run surpluses and build reserves for future uncertainties.

By accumulating these surpluses, governments can strengthen their balance sheet and prepare for the next inevitable downturn. 

Since the end of COVID, Canada’s federal government has done too little of that. This year, debt will be almost 44 percent of GDP—down from its 48 percent peak but still far above the 31 percent before COVID hit.

There are also lessons for provinces. Much of the growth in projected U.S. federal spending is directed toward major health care programs. In Canada, health care is primarily the responsibility of provinces, and our aging population is stretching their finances.

Yet provinces, regardless of political affiliation, consistently fail to plan for this long-term reality. Instead of crafting sustainable policies, they often resort to passing the burden onto the federal government by demanding ever-greater transfers. This act of kicking fiscal cans down the road mirrors the U.S. approach, and it’s fraught with risks.

A sustainable fiscal path requires a firm commitment to responsible long-term policies and clear communication about the choices being made. 

Neither is easy. But both are needed to avoid U.S. mistakes.

Joanna Baron: Israel’s Declaration of Independence

Commentary

The impasse over Prime Minister Benjamin Netanyahu’s judicial reforms is, as much of Israeli public life, existential. Bibi’s new law, the first plank of which prohibits the Israeli Supreme Court from determining if elected officials’ decisions are “reasonable“, has sparked dissent in practically every major institution in Israeli society: the media, the courts, government, the civil service, and the military. And Netanyahu is not done yet. He’s promised several more reforms, including changes to the judicial appointments process and the adoption of a notwithstanding clause modelled on Canada’s s. 33.

To opponents, Netanyahu’s reforms will neuter a court that has served as a critical moderating influence. They fear that the reforms will mean further entrenchment of government subsidies and exemptions from military duty for Israel’s ultra-Orthodox. They also worry about formal annexation of the West Bank and its Palestinian population. A truism for many Israelis is that Israel can only be two of three things: Jewish, democratic, and a territory. Opponents say that weakening the court will jettison Israel’s democratic nature. 

To their proponents, on the other hand, the reforms are an important corrective to a court that has arrogantly overturned laws and vitiated government appointments that had majoritarian support, and which in fairly recent history allotted itself a toolbox of powers that would make most other Western democracies blush—including the reasonableness doctrine that Netanyahu’s government repealed.

Adding to the general chaos is the fact that Israel lacks a single written constitution—something that was tabled and rejected by the country’s founders due to the fractious nature of the population and the supervening imperative of establishing a state in the first place. It has instead the so-called Basic Laws, quasi-constitutional statutes passed by a simple majority of the Israeli parliament. The primacy of Basic Laws over ordinary statutes is highly contested.

This does not, however, mean that Israel has no founding texts that outline basic rights and provide evidence of a consensus political culture. Israel does have a Declaration of Independence. 

This Declaration is the subject of an important new book, Israel’s Declaration of Independence: The History and Political Theory of the Nation’s Founding Moment by Neil Rogachevsky and Dov Zigler. The book is the first comprehensive English-language analysis of the text and its originating drafts and it couldn’t have landed at a better time.

The text that Israel’s founding Prime Minister David Ben-Gurion proclaimed at the Tel Aviv Museum in 1948 begins with a declaration of founding:

By virtue of our natural and historic right and on the strength of the Resolution of the United Nations General Assembly, [We] hereby declare the establishment of a Jewish State in Eretz-Israel, to be known as the State of Israel.

It goes on to enumerate the new nation’s political ideals and the outlines of its basic guaranteed rights, explicitly connecting these to Biblical history:

The State of Israel… will be based on freedom, justice and peace as envisaged by the prophets of Israel; it will ensure complete equality of social and political rights to all its inhabitants irrespective of religion, race or sex; it will guarantee freedom of religion, conscience, language, education and culture; it will safeguard the Holy Places of all religions; and it will be faithful to the principles of the Charter of the United Nations.

The Declaration was uttered on May 14, 1948, at 4:00 p.m., eight hours before the expiry of the British Mandate under the shadow of near-certain invasion by Israel’s neighbouring Arab states. It represented the first foray of an ancient nation onto the world stage of modern politics (and the first Jewish state since the fall of the Judean Kingdom in 133 CE); ensuring “the natural right of the Jewish people to be masters of their own fate, like all other nations, in their own sovereign State” while also guaranteeing the rights of minorities—even those with whom they were at war.

The declaration contains references both to the Jewish people’s connection to the land of Israel and the historical right following centuries of genocide and expulsion, most recently being, “the catastrophe which recently befell the Jewish people”, the Nazi Holocaust. 

In the book, Rogachevsky and Zigler trace how the modern nation of Israel settled on a Declaration that affirmed the nation would be democratic, rights-protecting, and Jewish. The book starts with the draft of U.K.-trained Tel Aviv lawyer Mordecai Beham. Overwhelmed by the gravitas of the task before him, Beham consulted with an erudite rabbi from Cleveland named Shalom Tzvi Davidowitz and ended up with a first draft that incorporated Deuteronomy, the spirit of the American Revolution, some principles of the rule of law from the English Bill of Rights, as well as language from the United Nations Resolution 181, which was passed by the General Assembly in November 1947, and which called for a Jewish state, an Arab state, and an internationally-administered city of Jerusalem in Palestine.

Later drafts by Tzvi Berenson, legal advisor to the Histadrut labour union, altered Beham’s version beyond recognition. Berenson’s draft channeled the Labour Zionist A.D. Gordon’s philosophy, which emphasizes state legitimacy based on delivering material progress to its people rather than the rights of the individual. Berenson’s draft declared the founding “by right of the unbroken historical and traditional connection of the people of Israel to the land of Israel, and by right of the labor and sacrifice of the pioneers.” This formulation would not make it into the final draft, instead, Ben Gurion would declare independence “by virtue of our natural and historical right.”

Rogachevsky and Zigler focus on the political theory implied by the Declaration. They note the significance of a late amendment to the draft made by Ben-Gurion, who changed the Declaration’s wording from proclaiming that the state would “bestow rights” to “ensure rights”. This is important because, in the tradition of Lockean natural law, Ben-Gurion claimed that rights properly “belong to the people” and are not mere inventions of the state. In his view, rights “bestowed” by the state may just as easily be stripped by the state.

Surprisingly, the final text did not include the word “democracy”, though the authors suggest too much has been made of this. The word had been included in most of the drafts leading up to the final text and was deleted by politician (and future prime minister) Moshe Sharett. Perhaps, the authors suggest, because it is clear throughout that the document was declaring the independence of both a procedurally democratic state (there would be voting) and a substantive democracy as well (there would be equal protection of rights), and perhaps because time was so short, this was simply not discussed.

Less surprisingly, the debates over religion’s place in the text remained controversial amongst members of the provisional government in the final days before the Declaration. Aharon Zisling, an ardent secularist, objected to the invocation of the “the Rock of Israel” (Tzur Yisrael), while more religious drafters argued for reference to a “God of Israel” and, more broadly, a theological justification for the state. Ben Gurion’s last words on the matter were an exemplar of political diplomacy and brilliance but foreshadowed the strife that would ensue on the question of Israel’s Jewishness and this latter’s political import:

“I know what the Tzur Israel that I have faith in is. Surely my friend on the Right knows what he believes, and I also know how my friend on the other side believes in it.”

Much of Israel’s political history has been characterized by such exigencies—the decision to avoid gridlock over debating a written constitution, crystallizing what the precise nature of Israel’s Jewish character entailed, even omitting to spell out the democratic nature of the state that was clearly envisioned by its drafters. Israel’s early architects well understood the overriding imperative to, in Ben-Gurion’s words, “determine political reality.”

The Declaration has ricocheted throughout contemporary Israeli history and was directly influential in the crafting of the Basic Laws. Justice Aharon Barak, who shepherded Israel’s judicial renaissance from a meeker procedural court to one of the most interventionist high courts in the world, recently took to the pages of Israel’s main Left-leaning daily Ha’aretz to urge the adoption of a written constitution, “based on the values of Israel’s Declaration of Independence as a Jewish and democratic state.” According to Barak,  “These values are the values of heritage and Zionism on the one hand and the values of human rights and the rule of law on the other.”

It’s difficult to see how Israel could settle on a written constitution amid the current turmoil. Israel’s Supreme Court is currently preparing to hear submissions in mid-September rejecting the constitutionality of Netanyahu’s first plank of judicial reforms, the repeal of the Court’s ability to overturn ministerial decisions based on unreasonableness. If the Court invalidates the reforms, as it is widely rumoured to be inclined to do, it’s difficult to see how Israeli society will recover from the crisis.

Then again, Zigler and Rogachevsky’s book is a reminder of the rich history of the common meaning of Israel, and the warrior nation’s scrappy ability to prevail through even the most fraught of circumstances. If Israel pulls through, it may be because there is still enough to unite the nation as there was when Ben-Gurion spoke at the Tel Aviv Museum in 1948.