A Billion Here, a Billion There

We are in the throes of a very important Federal election and, as usual, the parties vying for power are flinging money around by the billion. From infrastructure for mining development, to the defense in the Arctic and higher pay for our armed forces personnel, to building a hundred thousand rent controlled houses, all the parties are making money laden promises of handouts or tax cuts to win our votes. 

There is no question that we need investments in many, if not all of the things that are "promised". However, whichever party attains power, it is my opinion that they do not go staggering off spending money like the proverbial drunken sailor. Some progress has been made with respect to our fiscal situation (believe it or not) despite the spending sprees of the previous government. In the environment in which we must now operate, the investments we make will need to be focused and strategic. Rather than try to be all things to all people we must be mindful of the impact on our budgetary deficit and fiscal flexibility.

Canada's net debt to GDP ratio (projected in 2024) at 14.4%, was well below the average net debt of the other G7 countries at 103.8%. As of March 2024 Canada's total government debt (inclusive of Provincial debt) reached 69.4% of the country's nominal, or "current dollar" GDP.  (https://www.ceicdata.com/en/indicator/canada/government-debt--of-nominal-gdp#:~:text=Canada%20Government%20Debt:%20%%20of%20GDP%20*,low%20of%2033.1%20%%20in%20Mar%201977.)

Why is the GDP-to-debt ratio such an important measure of where we stand economically speaking, among the many metrics that economists watch? It is because debt to GDP is an indicator of a country's ability to pay its debts based on its economic output. For the foreseeable future our economic output will likely be constrained.

If we think for a moment that just like any household, the more debt we carry the more limited our choices become regarding the spending we need to undertake to run our household, and avoid having to make even more limited choices - or worse, file for bankruptcy.  At the country level a high or increasing debt to GDP ratio constrains our ability to generate wealth for our citizens - not to mention to continue funding our social programs and public services. As long as we can continue to produce goods and services, and sell them domestically and internationally at a reasonable and growing clip (or as in the household our ability to earn income is not compromised by a job loss or things like severe inflation) we should be able to sustain and improve our standard of living. This is another way to gauge our fiscal health or our ability to fund our essential services and programs.

Before the economic war was waged upon us by the American administration, combined federal and provincial debt-to-GDP ratio was projected to increase to 75.2%. (www.ceicdata.com).  The prospect for the somewhat favourable position we are in at the moment will change under the  current circumstances. As has already been noted, before the current upheaval in our relationship with the US, the country that purchases 75% of our productive output, the OECD noted: 

"Strong revenues have reduced fiscal deficits even as the federal government has extended living-cost relief and announced measures to make housing and childcare more affordable. But multi-year spending commitments will make it hard to sustain budget improvements without improved tax and spending efficiency. Moreover, for Canada to escape years of weak investment and tepid productivity growth, reforms to improve the business climate are overdue".  (https://www.oecd.org/en/topics/sub-issues/economic-surveys/canada-economic-snapshot.html)

The OECD's concise observation is a critically important warning for any path we intend to take in the near future. Given the political, economic and geopolitical issues we now face we will need to make some difficult choices about where put whatever we are able to earn as a country to good purpose. We cannot simply throw the billions around or deploy those funds without the thought of the impact on our ability to fund the essential services we wish to retain. What is required, in my view, is the following:

1. We need to re-evaluate the division of responsibilities between our various levels of government with a view to sticking to our constitutional lanes of responsibility. In other words, each level of government needs to look at their bureaucracies and determine whether they are encroaching on the responsibility of another level of government and, more importantly, whether a program merits continued attention, reduced investment or termination.  The rationalization of responsibilities should be the first order of all government's agendas now.

In this regard I am not advocating for a DOGE style, blunt axe purge of whole departments or functions. Rather, a clear eyed and rational approach to ensuring that any and all departments of all levels of government are providing services within their constitutional purview and doing so with a value for money perspective. Any savings from such an exercise can then be deployed where they are most needed.

2. Our tax system requires changes to support consumer spending, a key contributor to GDP, and business investment.  David Rosenberg, who operates an economic and business research firm and a regular contributor to the Globe and Mail has advocated for an aggressive cut of top personal, corporate and capital gains marginal tax rates (the latter two below US levels) to spur growth through consumption and incentivize investment. This is a very good idea. Both the Liberals and the Conservatives have suggested different levels of cuts to the marginal tax on incomes - this is one step in the right direction. Rosenburg suggests making up the difference with consumption taxes so that the negative effect on government debt levels will be negated. The trade-off is worthy of serious consideration.

3. The productivity crisis, that is, the amount of income and production generated per hour worked, must be addressed. We cannot continue to get away with a productivity rate that is, as referenced by the OECD, as one of worst among the G7. The Growth Project, an initiative of the Royal Bank of Canada, summed this issue up as follows:

"Globally, we’ve fallen behind most major economies since 2000. At the turn of the century, the economic output of the average Canadian was on par with Australia. Today, Australians are almost 10% more productive, while their economy has grown 50% per person faster than Canada’s over the quarter century. We’re further behind the United States. Canada is 30% less productive than the U.S. and closer to lower-income states like Alabama in terms of economic performance than tech-rich California or New York. The result: We’ve fallen from the 6th most productive economy in the Organization for Economic Co-operation and Development in 1970 to the 18th as of 2022." (https://thoughtleadership.rbc.com/canadas-growth-challenge-why-the-economy-is-stuck-in-neutral)

By all accounts we have slipped even further in subsequent years. To put it in terms that demonstrates the comparative context with our largest trading partner: " The productivity gap with the U.S. stands at about $20,000 per person a year, putting Canadians’ wages roughly 8% below their U.S. counterparts".

Therefore, our inability to produce products at the same level of efficiency as other nations will continue to degrade our competitiveness in conjunction with our ability to support the standard of living that we have come to expect. Moreover, with the adjustments we will face in the near term, this issue will be magnified to our economic detriment.

4. We must urgently employ other revenue raising options that do not impact consumer confidence. Again, David Rosenburg has made an excellent suggestion to defray the impact of tax cuts and/or an increase to the GST by taking advantage of the "unprecedented wave of nationalist sentiment by restarting the Canada Savings Bond program".

"There is no better time than now to rekindle the program. Call them “Tariff War Bonds,” or “Canadian Investment Bonds,” or just go back to the old “Canada Savings Bonds.” That program was hugely popular and, in the current context, would be an ideal way to buy into the nationalistic feeling sweeping across the country.

If Canadians are willing to “Buy Canadian” at the local grocery store or retail outlet, and are choosing to vacation at home, the Finance Department should be aware that the demand for these bonds would be immense: a low-cost, stable source of funding that does not rely on the fickleness of foreign investors or bond fund managers. And for Canadians, they would offer another way to demonstrate their dedication to the country and the vital need to protect the domestic economy from our trade foe south of the border."  Canada is at economic war. It’s time for Ottawa to make these bold moves to save the country The Globe and Mail March 28, 2025

These actions, taken in conjunction with the elimination of inter-provincial trade barriers, and trade diversification will free up capital for potential investment by Canadians in Canadian businesses, the consumption of Canadian business products, new business investment in our viable industries and small businesses which they in turn can deploy to productivity improvements, training of their workforce, new value-added product and market development. The growth in our GDP and the avoidance of greater debt, will allow for national investments in critical social programs, our infrastructure and in our  security and defense.

No actions that require effort and political/economic willpower to undertake are easy - but there has never been a time in our history where taking these actions are more consequential to our future to stand on our own, weather the geo-political storms and emerge more prosperous in the years ahead.