WHO SHOULD PAY FOR COVID DEBT?
Scott Clark and Peter DeVries
The budget is now tentatively scheduled for late April. This is a critical budget for the government because expectations (and hopes) among Canadians are very high and rising. Recent polls show that a majority of Canadians believe that a Liberal government would do the best job in managing the government’s post-COVID finances.
All this could change quickly if the budget fails to live up to growing hopes for a post-COVID future. It is no wonder then that the Minister of Finance is taking her time. This budget must demonstrate not just fiscal credibility but also political credibility. Election fever appears to be running very high among Liberals and if the budget is a success then an election is likely to follow soon after.
After a slow start, the vaccine roll out now appears to be running smoothly, and barring any unforeseen disruptions, it is likely that most Canadians will be vaccinated by September. The economy is already beginning to show signs of restarting and by the end of the year an economic recovery should be well under way.
If there is to be an April budget then most of the major budget decisions should already have been made. This would include, for example: the economic assumptions to be used in planning the budget; how much of the economic stimulus announced in the November 2020 Economic Statement will be applied; what form it will take; how it will be targeted; and, how long it will last.
However, the fact that the budget date has been delayed and that there has been few if any budget “leaks” suggests that there still remains major policy issues to be resolved. Indeed it would appear that the government is simply unable to decide on what the budget should do. Should the budget deal only with the economic recovery (i.e., economic stimulus) for the next two to three years, or should it go further and set out a medium to longer-term economic growth strategy? Given the number and complexity of the policy issues involved, it may very well be that the government simply is unable to decide what a “political” longer-term growth plan is.
Regardless of the choice eventually made, the Finance Minister will need, at a minimum, to set out a set of medium-term fiscal principles that will guide the government in managing future deficits and debt in a sustainable and credible fashion. It is highly unlikely that these principles will include reducing the deficit and the debt ratio to pre-COVID levels, in 5 or 10 years.
One of the fiscal principles will have to address who should pay for the debt incurred by temporary COVID spending. Unfortunately, the current view in the government appears to be that because long- term interest rates are currently very low, the government can debt finance all its COVID spending.
However, the use of borrowed money to pay for government spending should depend on whether there are benefits from the spending for future generations. Spending by a government on child care, health care, education, infrastructure, research and innovation, and the promotion of a “green economy” will pay off over a longer period of time and so from an intergenerational perspective can be paid for through borrowing.
However, most of the COVID spending is temporary income support with no benefit for future generations and as such should not be debt financed. Total COVID spending announced to date totals about $270 billion. Of that amount, about $20 billion relates to measures to help find a COVID cure, stockpile protective equipment, support other nations and provide longer-term reforms. This leaves about $250 billion in spending that can be classified as short-term consumption spending and should not be passed onto future generations.
Such COVID spending should be paid for through reductions in existing program spending and/or higher taxes. Even though a new program review of spending would be useful, it would not yield the savings needed to pay off COVID spending over a reasonable time period. Over sixty percent of spending is statutory in nature, mainly transfers to persons for elderly, employment insurance and child care benefits and to other levels of government for health care social assistance, equalization municipal infrastructure, among others. These programs are under pressure to do more not less. The remainder, which requires annual Parliamentary appropriations, includes many areas under stress and would also be difficult to cut. This includes transfers to First Nations, farmers and students among others. This leaves only operations of government of which the largest component is personnel costs.
Taxes should be raised “temporarily” to pay for the increase in debt resulting from temporary COVID spending. The federal government in the past has used temporary surtaxes. These include, for example, a general surtax, a high income surtax, a corporate profit surtax, and a financial institutions profits surtax. The GST could also be temporarily restored to its pre-2006 level of 7 percent.
Assuming COVID spending resulted in an increase in temporary debt of around $250 billion then a combination of temporary surtaxes could be used to pay off the COVID spending debt over 5 years ($50 billion or 2.5% of GDP a year). A reduction in COVID debt would allow the government to undertake an equal amount of more productive investments with long-term benefits.
Is this likely to happen? The standard political reaction will be that a government cannot get elected on a platform that raises taxes. This may or may not be true since it is hard to remember a federal election where it has been tried. During the 1990s the Liberal government under Jean Chretien maintained income surtaxes, a surtax on financial institutions and a partial non-indexed income tax system. Jean Chretien promised to eliminate the GST during the 1993 election. Of course he didn’t and no one seemed to care. He went on to win two majority governments.
Of course it depends on what surtaxes would be used to pay off COVID debt, and some combinations might be more acceptable than others. The question is simple. Would Canadians prefer to dump COVID debt on their children and grandchildren or pay for it themselves?
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ABOUT THE AUTHORS:
Scott Clark - Mr. Clark is currently President of C. S. Clark Consulting. Prior to that Mr. Clark held a number of senior positions in the Canadian Government dealing with both domestic and international policy issues. In regard to domestic policy issues, Mr. Clark served in a number of Assistant Deputy minister positions in the Department of Finance. He also served as Associate Deputy Minister of Finance (1994-1997), Deputy Minister of Finance (1998-2001), and Senior Adviser to the Prime Minister (2001). On the international side, Mr. Clark was Canada’s Executive Director to the International Monetary Fund (1989-1992), Canada’s G-7 Deputy (1992-1994), and Canada’s Executive Director to the European Bank for Reconstruction and Development (2001-2006). As Deputy Minister of Finance Mr. Clark served as an ex-officio member on the Board of directors of the Bank of Canada and Export Development Canada. Mr. Clark was adviser to the Independent Evaluation Office of the International Monetary Fund (2007-2009). He was visiting Fellow at the School of Public Policy, Queens University (2000-2001) and Director of the Queens Institute for Energy and Environmental Policy (2007). Mr. Clark lectured at the University of Western Ontario (1969-1976), and has guest lectured at the University of China, Hong Kong (2004), and provided advice to the Government of Viet Nam (2005). Mr. Clark has an honors BA in Economics and mathematics from Queen’s University (1966) and a PhD in Economics from the University of California at Berkeley (1971).
Peter DeVries - Mr. DeVries is currently a consultant in fiscal policy and public management issues, primarily on an international basis. From 1984 to 2005, he held a number of senior positions in the Department of Finance. From 1990 to 2005, he was Director Fiscal Policy Division Department of Finance, responsible for overall preparation of the federal budget; preparation and assessment of medium- and long-term projections of federal revenues and expenses and implications for fiscal policy; analysis of fiscal conditions at both the federal and provincial levels; evaluation of various budget proposals; preparation of monthly Fiscal Monitor; with the Office of the Comptroller General (OCG), assessing and evaluating accounting standards proposed by the Public Sector Accounting Board (PSAB) of the CICA and recommending changes in government accounting policies; with the OCG, responsible for implementation of accrual accounting for the federal budget and the government’s financial statements. From 1984 to 1990, he was Assistant Director Fiscal Policy Division. From 1978-1984, he was Chief Consumer Prices Section Statistics Canada, responsible for preparation of the monthly Consumer Price Index. From 1976-1978, he was Chief Economist and Special Advisor to Assistant Deputy Minister Canada Employment and Insurance Commission, responsible for preparation of labour market forecasts; assessment of current economic developments. From 1971-1976, he was economist with the Labour Division at Statistics Canada, responsible for preparation of labour income statistics. He has been a member on various PSAB’s task forces, examining government accounting issues and from 2002-2005, he was a member of the Board of Directors of the Public Sector Accounting Board. Mr. DeVries holds a MA in economics from McMaster University.
The views and opinions expressed are those of the author and do not necessarily reflect the position of Air Quotes media.
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