Getting political responsibility right in times of crises

More often than not, politicians are given too much credit for both economic expansions (i.e. prosperity) as well as recessions. That’s not to say that policies don’t matter because they do. But the idea that a politician or government can prevent recessions through clairvoyant foresight isn’t realistic or empirically accurate. What’s appropriate, however, is judging politicians on their policies and the degree to which they prepared an economy for the inevitable slowdowns that happen roughly every decade or so.

While it’s too soon to definitively conclude one way or the other how the federal government managed the current crisis, it’s clear that the government failed in setting the country up to weather the current crisis while also putting in place (pre-crisis) policies that will hinder recovery. For these two failures, the government should be held to account.

The contrast between the fiscal policies – spending, taxing, and borrowing—of the Trudeau government and the Chrétien-Martin-Harper (pre-recession) governments could not be more stark. The latter required surpluses to pay down the debt during the “good” times while the former increased spending considerably almost entirely through new borrowing. In total, the Trudeau government has increased federal debt by $84.3 billion as of March 2020, which is before accounting for the various measures introduced to combat the current recession, which are now estimated to cost at least $110 billion.

Put differently, the federal debt going into the current recession would have stood at $617.9 billion rather than the expected $713.2 billion had the Trudeau government followed more prudent fiscal policies like previous Liberal and Conservative governments.

At almost turn the Trudeau government has demonstrated its zeal for spending with utter disregard for deficits and debt. In the spring of 2018, for instance, the government budgeted for $312.2 billion in spending for the fiscal year 2018-19. Later that same year, the government revealed that revenues were $5.5 billion higher than expected and interest costs were $2.5 billion lower than budgeted. Had the government just stuck with its original spending plan, the federal deficit would have been reduced by more than half.

Instead, the federal government increased spending (excluding interest costs) by $8.0 billion, erasing the higher revenues and lower interest costs, with the ensuing deficit the same as originally planned: $15.1 billion. Not only that, the fall update increased spending the following year by another $6.8 billion, which was on top of the originally planned increase of $9.3 billion. There are many adjectives to describe this approach to budgeting but contrary to the prime minister and his finance minister, “prudence” is not one of them.

The size of the deficit and mounting federal debt will impede the country’s recovery, but so will some of the policies enacted by the federal government before the recession. The federal government chose to introduce a host of policies that encumber industries with greenhouse gas emissions, none more high-profile than the national carbon tax. The way the tax is designed coupled with the absence of an equivalent tax in most of our trading partners, particularly the United States, means that the cost increases from the carbon tax will reduce the competitiveness of a host of industries such as petroleum and coal, agricultural chemical manufacturing, electric power generation, transmission and distribution, and basic chemical manufacturing.

The anti-competitiveness of the federal carbon tax was then amplified for the country’s energy sector by the cancellation (directly or indirectly) of multiple pipeline projects, and policies such as federal Bill C-48 (prohibition against exporting Alberta bitumen via the West Coast) and Bill C-69 (significantly complicated and heightened uncertainty around the process for large-scale project approval, including infrastructure such as pipelines).

The federal government—along with almost all the provinces—also reduced Canada’s tax competitiveness by raising personal income tax rates on workers, particularly professionals and entrepreneurs. For instance, of the 61 Canadian provinces and U.S. states (including Washington, D.C.), Nova Scotia currently has the highest combined top statutory marginal personal income tax rate (54.0 per cent), followed by Ontario (53.5 per cent), and Quebec (53.3 per cent). Moreover, nine Canadian provinces occupy the list of the 10 jurisdictions with the highest top combined marginal income tax rates and all provinces are in the top 12. In 2018 (latest year of available international data), Canada had the 7th highest combined top personal income tax rate out of 34 industrialized countries.

These policies were combining to reduce Canada’s attractiveness as a place to do business and invest well before the recession. As my colleagues recently pointed out, “business investment was down $2.4 billion or -0.7 per cent in 2019. This includes both domestic and foreign direct investment.” Over the last five years, business investment excluding residential housing has decreased 17.3 per cent (after adjusting for inflation). And as a recent study concluded, these declines were not confined to the energy sector. Between 2014 and 2017, the latest available data, 10 of 15 industries experienced a decline in private sector investment. Finally, when examining the flow of foreign investment into Canada and the investment of Canadians outside of Canada, there was nearly $35 billion (net) that left the country in 2019.

As the health crisis related to COVID-19 starts to stabilize, hopefully sooner rather than later, Canadians will start to focus on the need for economic recovery. Undoing much of the damaging policies implemented over the last five years that have impaired Canada’s competitiveness and attractiveness for investors, entrepreneurs, and professionals would do a great deal to establish a platform for recovery and future prosperity.