In light of Ottawa's massive budget deficit and mounting debt, the Fraser Institute, an independent, non-partisan Canadian public policy think-tank, believes the Federal Government should push towards a budget balance.
Spending by all governments in Canada is projected to hit 57.3 percent of GDP in 2020. That's more than at any time in our history, including both world wars. Among all countries — advanced, emerging and developing — Canada amassed the largest deficit at 19.9 percent of GDP.
Mintz argues that our sky-high deficit and spending is because we have thrown money around more liberally than other countries. The prime example he cites is the WE Charity scandal. Halfway through the student summer, a $1-billion program would be piled on to an already generous $8 billion commitment to assist post-secondary students.
Another is the Federal Government's decision to maintain bi-weekly $1,000 Canada Recovery Benefit cheques to Sept. 25, 2021, even though the economy is doing much better now than in March/April.
"When governments rack up high levels of debt to finance spending, private investment is crowded out, which of course lowers productivity growth," said Jack Mintz, president's fellow at the University of Calgary and author of the essay Putting Government on a Financial Diet: The Role of Statutory Fiscal Rules.
"Overall, so much federal money has been spent on average Canadians having more personal income today than they did pre-COVID — even though average employment income has fallen dramatically. Doling out money may be a politician's dream, but it will be a nightmare for our children and grandchildren when the bill comes due."
According to Mintz, the "balanced budget" rule should be legislated and possibly include annual federal deficit targets leading to budget balance.
A separate essay finds that Canada's governments substantially exceed the Government's optimal size to maximize economic growth and increase the possibility of a four-day workweek.
"The recent expansion of government spending during the pandemic should only be temporary because permanently increasing the size of government will likely mean higher taxes and slower productivity growth in the future, which is bad news for working Canadians and their families," said Livio Di Matteo, professor of economics at Lakehead University, a senior fellow at the Fraser Institute and author of the essay Government Size and Economic Growth: An Overview.
Based on data from 17 developed countries from 1870 to 2016, the optimal size of the Government for economic growth ranges from 24 percent to 32 percent (as a share of the economy). However, since the 1970s, Canada's total government size has ranged from 35 percent to 53 percent.
To ensure transparency, Parliament should establish a council — independent from the Government — to monitor Ottawa's fiscal process or direct the Parliamentary Budget Office to monitor the fiscal plan closely. And if the Government fails to achieve its fiscal targets, politicians should be penalized with salary reductions.
C.D. Howe Institute: Deficit spending does not curb long-term joblessness
In an Intelligence Memo from the C.D. Howe Institute, more than 1.3 million Canadians have been out of work for more than six months. Between March and September 2020, the number of Canadians who have been jobless for more than six months increased by 107 percent, far exceeding the peak increase of 37 percent over the same length of time in the 2008 financial crisis.
This unprecedented increase in long-term joblessness reflects the persistent impact of COVID-19 shutdowns, the ongoing impact of the health crisis, its impact on workers' expectations of a recall by past employers, and childcare challenges facing parents.
A higher proportion of the current long-term jobless is awaiting recall than usual. In particular, 9.8 percent of September's long-term jobless were awaiting recall from their previous employer. For comparison, only 1.5 percent of the long-term unemployed were awaiting recall in March 2020, and 1.2 percent in September 2019.
Older and long-tenured workers, particularly those in manufacturing, fare substantially worse than other groups when they are laid off compared to younger workers. However, young workers (aged 20-35) constituted 40 percent of the long-term jobless in September, compared to 32 percent in September 2019, despite having more significant incentives to invest in new skills as part of their recovery efforts through education or on-the-job training.
However, CRB and subsequent EI payments do not differentiate between full-time and part-time work. Most part-time workers will get the entire benefit — unlike full-timers paid the same weekly wage. Thus the CRB will act as a work disincentive, causing many part-timers to delay joining the workforce.
Third, once the health crisis has passed and recruitment ramps up, employers may rely less on the length of joblessness as a signal of a job applicant's suitability, given the exceptional circumstances workers face in the labour market. This would improve the chances of long-term jobless.
According to the C.D. Howe Institute:
"Despite our reasons for optimism, we still think policymakers should respond quickly to counter further growth in long-term joblessness. Ignoring such growth is risky: long-term disengagement from the labour market of a large cohort of young people may carry a high price for young workers. Some young workers will independently seek out opportunities during this crisis: for example, 16.5 percent of the long-term jobless were enrolled in school in September 2020, but many will need support to find such opportunities, particularly those shifting to new occupations or industries due to structural labour market shifts. Early investments in their labour market attachment – whether training for jobs in growing industries, supporting formal education efforts, or matching workers' existing skills with new occupations – should have high returns for workers in terms of their productivity and, ultimately, their wages."
Such investments to improve the long-term joblessness prospects may appear costly, but there are broader fiscal impacts to consider. When provincial and federal governments are projecting massive deficits to manage the pandemic, we want to keep as many Canadians as possible employed, reduce their reliance on income support programs, and strengthen their ability to help bear the long-term financial burden of this crisis.