When the current pandemic finally ends, Canadians will need to be prepared to have a very difficult conversation regarding the state of our national finances. To do so requires some historical context.
In December 1965 the national debt was $13,997,669,893.00. That debt had been created through the process of building a nation, and fighting two world wars. In the mid 1960s it was considered the sign of a competent government that the budget was balanced. Canada followed strict Keynesian economic theory which among others things stated a government should balance the budget and pay down debt during good times, and run deficits and accrue debt to assist the nation during bad times (wars, recessions, etc.) The idea that the budget should be balanced at all times outside of a crisis, changed when Pierre Trudeau came to power in 1968. When he left office in 1984 the national debt was almost $129 billion! Brian Mulroney’s government balanced the operating budget, but with interest rates near 20 per cent the debt and deficit kept increasing. It took the government of Jean Chrétien in the mid 1990s ruthlessly slashing costs to finally begin paying down the national debt and balance the budget. They were aided in doing so by a booming Alberta economy fuelled by high oil prices.
Since then, until the government of Justin Trudeau took office in 2015 with the promise to return to deficit budgets, governments across Canada of all political stripes worked toward balanced budgets. The government of Stephen Harper ran deficits during the financial crisis of 2008/09 to support the economy and at that time it certainly appeared that Keynesian economic theory was back in vogue. That is until Justin Trudeau’s took a surplus budget from Harper and like his father began running deficits — and doing so in a strong economic environment.
Since the pandemic struck the world the federal government has “piled up” debt at a rate we have not seen since the Second World War to support Canadians. Canada was able to pay off that previous debt as we moved into a period of huge economic growth and Canadian companies were assisting in rebuilding war ravaged Europe and Asia. That will not be the case when the pandemic ends. The national debt will have passed a $1 trillion and the budget deficit will be over $400,000,000.00. The debate we must have is how will we pay this debt off and return to a balanced budget?
Again, unlike the end of the Second World War, our companies won’t be rebuilding the world. The rate of growth will be nowhere like we saw in the 1950s. Oil prices are way down and as a result so is the Alberta economy. Alberta can’t help Canada now. So what options will our federal government have? There will really only be two options or perhaps a combination of the two.
One option will be austerity at a rate Canadians will have never seen. Anyone over the age of 35 will remember the “slashing and burning” of programs and transfer payments by the government of Jean Chrétien in the mid 1990s in order to get the debt situation under control. Well as the song says “You ain’t seen nothing yet” will be the story of austerity by future governments as they try and get the debt situation under control. Canadians will be asked to sacrifice at a level not seen since the Second World War, in order to try and not burden future generations with this debt.
Another option will be tax increases. One can certainly foresee increases in personal and corporate taxes as well as increases in the HST. However a government can only raises taxes so high until people begin to rebel and we see the black market expand. Remember when governments had to slash tobacco taxes in the 1990s to combat the illegal tobacco market? And keep in mind that a two per cent increase in the HST amounts to about 20 billion additional dollars. Sounds impressive until you look at the sheer size of both the deficit and debt.
The other option of course is a combination of the two options. This is the route I believe future governments will choose.
The real shame we will all face, is the pandemic certainly showed us the major cracks that had appeared in our social programs. And with this massive debt we will not have the financial resources available to repair those same programs. Future governments will certainly face a struggle.