From the perspective of this week, the biggest news on Monday was the pressure building on (now former) speaker Anthony Rota to step down after his disastrous decision to lead the Commons in honouring a 98-year-old veteran of the Waffen SS.
Lost in that furor was another news item that foreshadows a profound shift in Canadians’ fortunes for years to come: long-term interest rates hit their highest level in 16 years.
The increase – far beyond what Ottawa contemplated in its March budget – could simply be a cyclical upswing. But there is increasing evidence that interest rates will settle at a permanently higher rate, part of a significantly harsher economic, fiscal and political post-pandemic reality. And that points to a world of hard and harder choices for individual Canadians, businesses and, most of all, governments.
Former Bank of Canada governor David Dodge sketched out that cold future during comments at prebudget consultations by the House of Commons finance committee. “We’re in a period of rapid and extensive structural change,” he said.
The ex-governor went on to list four challenges, any one of which would be daunting: the aging of the Canadian population, with its attendant pressures on the labour market and public spending; climate change and adaptation; a fragmenting global economy; and disruptive technologies such as artificial intelligence.
Each of those four shifts will be expensive, both for the private and public sectors. And those expenses will be arriving as interest rates move higher, and are applied to significantly higher debt levels.
The upshot from Mr. Dodge: the emphasis of public policy needs to shift from borrowing to finance current consumption to focused measures that boost production – within the confines of a balanced budget. And that needs to begin not eventually, not by some time next decade, but in the next budget, six months from now.
Mr. Dodge is not given to hyperbole or to partisan excess. The federal Liberals would do well to heed his counsel. But the government’s track record on that front is not auspicious.
The ex-governor was among those calling for fiscal prudence in the fall of 2020. Finance Minister Chrystia Freeland dismissed such concerns as outdated in an October, 2020, speech, saying “it is a poor general who fights the last war.”
Her argument was that economic growth would be higher than interest rates for years to come, meaning that governments could run permanent large deficits without fear. Deflation was a bigger threat than inflation and debt pressures.
As things turned out, Mr. Dodge and all the other supposedly backward-looking generals were quite correct in their assessments, and Ms. Freeland was precisely wrong.
Mr. Dodge, class act that he is, declined to gloat, instead pointing out to the Commons committee the unfavourable arithmetic that awaits Ottawa and other indebted governments: “The burden of past debt will increase year after year, rather than being eroded.”
Those rising debt costs will arrive just as the need for investment – real investment, not the Liberals’ euphemism for new spending programs – will surge. That will entail a shift by households, businesses and government from consumption to savings and investment.
For Ottawa, that means moving from spending on (and borrowing for) current consumption to expenditures that boost the productive capacity of the economy. Yet the Liberals look to be headed in exactly the wrong direction: expanding the new federal dental benefit, and moving toward a national pharmacare program. Add to that this government’s habit of larding on a few billion dollars in new spending at every fiscal update and budget.
There is no great complexity in what Ottawa needs to do: reduce barriers that discourage investment, contain spending on entitlements and shift the focus of taxation to consumption rather than income. The only problem is that list is a near-complete repudiation of the Liberal economic program of the past eight years, which has relentlessly focused on redistributing rather than creating wealth.
There is an old tale about the grasshopper and the ant. The grasshopper dances away during the summer while the ant toils, preparing for winter. When the snows arrive, the grasshopper begs for help but none comes. The moral of that fable: the cost of short-sighted indulgence is high and, when the bill comes due, it’s too late to do anything about it.