Pandemic policy overkill will do long-term harm
The coronavirus and current economic recession will pass when an effective vaccine becomes widely available, but a vaccine won’t solve all of Canada’s pandemic-related problems. The federal government has horribly mismanaged the pandemic and abused it to implement sweeping unrelated interventionist policies, including billions of dollars more in climate change spending, while many provincial governments have imposed overly severe lockdowns and restrictions.
The sure consequence of these bad federal and provincial policies will be a weaker economy for years to come. Light and predictable taxation and regulation encourage people to make long-term economic investments, but by spending too much and restricting too heavily today, governments have signalled that over the long run, taxation will be heavy and uncertain, and regulation haphazard and unpredictable.
The federal fiscal update projects a deficit of from $381.6 billion to $398.7 billion this year and another massive deficit of from $121.2 billion to $166.7 billion next year. Even in 2025-26 (in other words, long after the COVID-19 crisis should have passed and the economy recovered), the government is still planning a deficit of up to $33.4 billion.
The federal net debt is projected to roughly double from $812.9 billion in 2019-20 to $1.6 trillion by 2025-26, which creates significant uncertainty about future taxation. If people anticipate higher taxes in the future, which is a perfectly reasonable expectation given how much debt has been added onto the pile, they will be discouraged from making long-term investments. And the uncertainty about which taxes might be raised, and when, and by how much, only further discourages investment.
While provincial governments haven’t opened their spending taps nearly as wide as the federal government, they too are unfortunately overspending and accumulating too much debt. The Ontario government, for example, projects that in 2022-23, by which time things should be back to normal, program spending including reserves will still be 18.3% of GDP — a higher spending-to-GDP ratio than Ontario ever had under the Liberal governments of Dalton McGuinty and Kathleen Wynne.
Provincial governments, including in Ontario and Manitoba, have also caused significant long-term economic harm with their most recent round of lockdowns on small and medium-sized businesses. While the lockdowns in the spring were perhaps understandable, as governments were unprepared for the pandemic and uncertain about the severity of the disease, the current lockdowns are much more difficult to justify.
The latest increases in restrictions essentially tell business owners that the government is perfectly willing to wipe out their investments — in many cases, business equity that they worked decades to build up — with arbitrary diktats. Where was the cost-benefit analyses for these government-enforced business shutdowns? And given this heavy-handed destruction and uncertainty about what sort of havoc governments might wreak the next time there is a perceived emergency (whether another pandemic or something else), how likely are small business owners to keep investing?
The coronavirus, to be sure, is a contagious and — particularly for the elderly — deadly disease. It is entirely reasonable to have higher government spending and regulation this year for things directly related to public health or poverty alleviation. But the massive spending increases, especially by the federal government, on things that have nothing to do with the pandemic, and the overly restrictive lockdowns by provincial governments, are not reasonable at all. They will cause significant long-term harm.
Matthew Lau est chercheur associé à l’IEDM. Il signe ce texte à titre personnel.