Pandemics are real. People are real. Jobs are real. Federal deficits are just a construct. Sometimes we forget. Hopefully this time we remember.
We are in the midst of a terrifying and historically significant crisis. To meet the challenge, Canadians have clearly voiced they want the government to use all resources at its disposal to protect them and reduce human suffering. Whether or not the cost fits into existing budget plans is irrelevant.
Containing COVID-19 and protecting those on the front lines is the top priority. But, it also means shutting down entire industrial sectors. Doing so resulted in 4 million people applying for Employment Insurance within a few weeks. These people need to be protected. In the short run they need income support so they can stay home, isolate themselves and prevent the spread of the virus. Eventually, when we come out the other end, it means sustained economic stimulus for years to come.
The immediate response from policy makers has been big, bold and fast. Canada’s COVID-19 Economic Response Plan outlines measures to support individuals, big business and everyone in between. There are flaws, naturally, but also an ongoing commitment to go further and keep people from falling through the cracks. Price tag be damned!
Public discourse about debt and deficits has changed in step with the development of these sweeping policies. Questions about affordability are rare and land as if they were beamed in from a different universe. The threat to the economy does not come from spending, it comes from not spending enough. The real human cost of inaction easily outweighs the cost of increased federal debt. The first phases of the response passed parliament with unanimous support.
In the alternate reality we all lived in a few weeks ago, critical questions would have seemed appropriate. If the finance minister had released a budget with a $185 billion deficit (8.5% of GDP), it would have caused an uproar from the opposition. The 2015 federal election was fought over which political parties would balance the budget and which would run a deficit in the range of 0.9 % of GDP. But that was a different time. Or was it?
It was not. There’s only one reality we live in and, in the last few weeks, policy makers have broadcast loud and clear which one it is. We live in a world where the responsible policy to meet the challenge is to spend whatever’s necessary. “Conventional wisdom” about debt and deficits is completely out of whack and seems petty in hindsight. It may be tempting to compartmentalize debates into two categories, before and after COVID-19, but it would be wrong to do so.
It is crucial that we not return to pre-existing deficit politics once the crisis is contained. There will need to be years of enhanced stimulus spending to ensure people get back to work.
During the 2008 financial crisis, a minority parliament agreed on a substantial fiscal stimulus package. However, shortly thereafter, the Conservative government began dismantling it. They aggressively attacked the deficit, restricting growth at a time when the economy needed investment. Estimates show that austerity measures in 2014-15 alone stunted GDP growth by 0.84% and resulted in approximately 90,000 job losses across the public and private sectors. All for the political goal of balancing the budget before the 2015 election.
Recall that to combat the early 1980s recession federal deficits reached this same peak in the mid-80s (8.1% of GDP). Mobilization during World War II required deficits almost three times as large (22.5% of GDP). The Canadian economy persevered.
After COVID-19 is contained, there will be economic fallout. In response, we need to protect the people who lost their jobs for the sake of limiting the spread of the virus. If we can’t tolerate higher deficits, these people will face very real hardship. We need to prioritize the real impacts of higher unemployment and poverty over the intangible costs of increased debt.
Collectively, we seem able to grasp the irrelevance of deficit politics during the critical moments in history, but then we forget. The job of the federal government is to do everything within its power to mitigate the negative effects of the impending downturn. Government has fiscal capacity to spend as much as necessary. That means providing swift, broad and bold support right now and prolonged stimulus spending in the coming years.
Originally posted on National Newswatch on April 10, 2020.