I don’t like deficits. I am not a fan of debt. Especially government deficits and debts. My reason? We will need to pay off the debt over time and in doing so, some of government revenue that could be used to support people and services ends up being used to service the interest on our debt.
Both the provincial and federal governments tabled their budgets last week with predicted deficits and increases in debt. Minister of Finance Chrystia Freeland revealed a federal deficit of $354.2 billion this past year (2020/21). To put that in perspective, the Federal government had revenues and expenses of $354.2 and $373.5 billion respectively in 2019. The deficit was roughly the same size as government in the previous year.
But Minister Freeland did point out the government predicted a deficit for 2020/21 of $381.6 billion so they ended up spending less than they provisioned for. Perhaps we will be so lucky in the coming years.
The federal government is predicting a deficit of $155 billion for 2021/22, and more than $50 billion in the following two fiscal years. It isn’t until 2025/26 that the minister is predicting the government will get things under control but even then she is predicting a deficit falling to only 1.1 percent of GDP with the debt-to-GDP ratio of 49.2 per cent.
This, of course, is at the federal level. Provincial debt is going to follow suit. Minister of Finance Selina Robinson’s budget included an updated forecast deficit for 2020/21 of only $8.1 billion versus the 2020 projection of $13.6 billion, again performing better than expected. So it did contain some good news but the minister is predicting deficits for the next few years. Indeed, “debt is expected to increase significantly to finance the investments needed to ensure continued support for British Columbians who need it and a strong economic recovery for B.C.”
As I said, I am not a big fan of government over-spending. Debt can cripple an economy. But we are also living under the shadow of a pandemic. And unlike the financial crisis in 2008, this is not one of our own making.
Viruses and other pathogens have routinely attacked and decimated whole populations over the course of human history. We have been lucky to have avoided major scourges for the past 100 years and should manage to avoid the death tolls seen during the 1919 pandemic or the Black Death or the Justinian Plagues.
Looking at Canada’s debt over the past 150 years, sharp increases in the total debt occur during times of crisis and war. The First World War saw debt rise from $204.9 million to $1.123 billion or by roughly five-fold. Similarly, the Second World War saw debt rise from $2.29 billion to $10.73 billion, again roughly five-fold. The depression in the 1930s saw the national debt double and the previous Conservative government increased the debt from $464.9 billion to $684.2 billion in response to the 2008 financial meltdown.
It is perhaps not surprising then to see both the federal and provincial debts rising as a consequence of the pandemic. Economic stimulus will be necessary in order to ensure a recovery. Governments must spend more than they take in during times of crisis. One can hardly argue the government should not be purchasing vaccines, medical supplies, and hospital equipment. Nor can it be argued the government shouldn’t be supporting workers displaced by the ongoing pandemic. And even helping out a struggling airline seems to make some sense if only to ensure they refund airfare for flights which were cancelled.
But government is playing a dangerous game. Or as Bill Robson of the C.D. Howe Institute put it to Global News: “We’re really on a knife’s edge here. It they’re lucky with interest rates, if they’re lucky with economic growth rates, then we’ll probably have a stable debt ratio.” But the debt-to-GDP ratio could creep higher if borrowing costs increase or we hit a rough economic patch.
So far, economic recovery is looking healthy. Our GDP did grow by 10 per cent in the last quarter of 2019, despite the pandemic or maybe because of it. There is a great deal of economic optimism amongst analysts believing the economy will rebound out of the pandemic in a manner similar to post-war times. And models do suggest the debt-to-GDP ratio will start to decline over time.
But lurking in both budgets is healthcare. The federal budget increases the amount of money transferred to the provinces and healthcare makes up on average about 40 percent of the provincial costs. It is the healthcare system that is under strain with the pandemic. Costs have sky rocketed and it is clear the systems are under-staffed.
Will these costs continue if and when we have COVID-19 under control? And what will the long term costs be given our aging population? Someone will need to pay.