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Deja vu

GB Geo-Blog

Deja vu

While reading Professor Jack Mintz’s column in Friday’s Financial Post, I felt as if I was transposed back to the 1980s. It was deja vu all over again.

In the 1980s, economists regularly warned the Canadian Government that it had to take drastic actions to eliminate its $30 billion plus annual deficit, or else Canada would hit the debt wall. A well, the sharply rising debt would place a great burden on future generations who would end up bearing the costs.

(By the way, in the 1980s, despite persistent $30 billion deficits, real interest rates on Government of Canada bonds did not increase to anywhere near the real rates, that include risk premiums, on the debts of Greece, Ireland, Portugal and Spain today. But the global financial markets encompassed a much smaller casino component in the 1980s than it does today.)

Economists also regularly warned that in addition to eliminating the deficit the federal government had to reduce tax rates, negotiate free trade agreements with the US and other countries, deregulate many industries, and sell off Crown Corporations in order to reduce the gaping productivity gap with the US.

Eventually the Jean Chretien-led Liberal Government did turn the deficit into a surplus by offloading spending cuts onto the provinces and riding the coattails of a strong US economy. The Canadian Government also negotiated the North American Free Trade Agreement, deregulated a number of sectors, and sold off several Crown Corporations. Yet, the gaping productivity gap with the US still exists. Obviously economists do not truly understand the sources of productivity growth.

Mintz argues that the current timeline to reduce the federal government deficit by 2015-16 is unacceptable, in part, because of the burden for future generations: “The bigger the public debt liability, the more costly it will be for the next generation.”

Mintz did state clearly that not only should spending be cut to balance the budget, but the cuts should be larger so as to allow for future tax cuts that would make Canada more competitive, and by implication, more productive. Mintz, at least, is upfront about his desire to reduce the overall size of government, unlike the Cassandras in the 1980s.

Mintz did raise the productivity conundrum directly: “Neither shall the larger public debt burden help our productivity.” He not only wants a smaller government, but he also believes that lower tax rates are the key to productivity growth.

He concluded his column: “A combination of constraining the growth of public spending and civil service compensation, increased user fees [as if these are not taxes] and privatizations are just some strategies that could Canada back into the black soon.” Privatization once more, but this time to generate money to reduce the cash needs of the government.

Well, we tried all of what Mintz has proposed and productivity growth rates did not pick up. Moreover, Canada’s economic growth was driven primarily by the US economy and rising commodity prices. The government’s economic policies probably played a marginal role at best.

As for the intergenerational canard, Mintz and other economists who want a much smaller government for ideological reasons, conveniently ignore the fact that the federal and provincial governments spend tens of billions of dollars annually on programs (e.g. education, infrastructure, health, training, judiciary, etc.) that support higher growth rate and higher future incomes, which benefit future generations. Furthermore, following in the footsteps of many of the European Union countries by drastically attacking the deficit will only increase the unemployment rate in Canada. The young (the future generation) would be hardest hit by deterioration in the labor market, and as a result they would suffer significant losses in incomes and experience. Their losses in the short and medium term would far outweigh any possible losses from higher tax rates, if they even materialized, in the future as a result of the federal government sticking to its deficit reduction timeline and ignoring the recommendations of Mintz and other economists of his ilk.

The opinions expressed in this blog are personal and do not reflect the views of either Global Brief or the Glendon School of Public and International Affairs.


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