The provinces seem happy kicking their deficits down the road and Ottawa is already spending campaign-style. Sorry, kids and grandkids!
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With Manitoba presenting this fiscal season’s last provincial budget on Tuesday, we now see that most premiers, whatever their political stripe, are squanderers at heart: doling out more than they can afford even in the absence of recession. They obviously either haven’t heard or are choosing to ignore former United States Federal Reserve Board chairman Alan Greenspan’s view that “deficit spending is simply a scheme for the hidden confiscation of wealth.”
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Except for Alberta and New Brunswick, which are running small surpluses, the provinces show little interest in controlling their deficits, never mind balancing their books. The three largest — Ontario, Quebec and British Columbia — expect their deficits to total $26.5 billion next year, up sharply from $10.4 billion this year. For the provinces as a group, deficits are expected to total $43 billion, an added debt burden of $1,050 per capita or $4,200 per family of four.
For the 2024-25 fiscal year, the 10 provinces’ net financial debt will rise to $946 billion, a mortgage equal to $93,000 per family of four. Capital budgeting makes it easier politically for governments to take on capital spending. Why? Even though infrastructure spending is amortized as an expense in later years, it’s not an expense in the current budget, which most voters don’t realize. It’s an appropriate accounting practice, but it lets government look more fiscally prudent in a year of massive capital spending. Ontario’s current capital spend is adding $24 billion to its debt. If that were expensed in the current year, it would have resulted in a reported deficit of $34 billion, not $10 billion.
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Carrying that almost trillion-dollar collective provincial debt requires interest expenses totalling $39 billion across provinces in the coming year. That’s more than total provincial spending on public order and safety, more than half of all provincial education spending and about one-sixth of provincial health-care spending.
In its recent budget, Ontario shows interest payments already averaging $4,000 per household and seems unfazed adding another $2,500 per household and stoking inflation and interest rates with its robust debt-financed spending.
The bad news is that the biggest deficit of all will be announced in the federal budget on April 16. The current April-to-January federal deficit is already $20-billion higher than last year’s and is expected to hit more than $40 billion this year. Federal public debt charges for the fiscal year that ended Easter Sunday will likely end up close to $46 billion, which, never mind chocolate eggs, could have paid for Canada’s defence spending twice over.
And more indebtedness is coming. Defining every new expenditure program as a “right” gives Ottawa an excuse to spend more. How could it deny Canadians their “rights”? This past week, the prime minister, taking a leaf from COVID days with daily spending announcements, publicized $1 billion in new spending on child-care spaces, $6 billion on housing, $15 billion in rental loans and $1 billion on school lunches. This is on top of a new pharmacare program, dental care, sky-is-the-limit climate and business subsidies and a host of other new programs.
Not surprisingly, polling shows that deficits and debt are low priorities for Canadian voters, who seem happy just passing the bill onto someone else. This attitude changes only when the costs of deficit financing become apparent to voters, as they did in both 1984 and 1993 when Canadians turfed the governments of, respectively, Liberal John Turner and Conservative Kim Campbell after a surge in out-of-control deficit spending during recessions.
Larger deficits add to inflationary pressures, which makes life harder for the Bank of Canada by moving the economy along at a faster pace than would allow the bank to cut interest rates. To make room for looser monetary policy, the government should tighten fiscal policy.
Public deficits also crowd out private investment. Governments issuing more bonds pushes up interest rates as investors come to see the debt as less and less sustainable. The cost of capital for businesses rises, weakening already anemic investment even further. And higher interest rates mean less homebuilding, despite sharp rises in housing demand because of immigration.
Burgeoning public deficits also create uncertainty for private investors, who expect governments will eventually have to raise taxes to finance their debt costs. Knowing it’s always tempting for governments to levy wealth and capital taxes, investors respond to growing deficits by deciding not to invest.
Deficit spending also causes a misallocation of resources. When child care was introduced at $10 per day, what would any competent planner expect? That even parents with alternative arrangements like neighbours, au pairs or grandparent supervision would rush to fill cheap child-care spaces. And that suppliers of child-care services, now heavily regulated, would close or cut back on spaces. The prime minister blames the provinces for the undersupply of child-care spaces but the root of problem is no mystery. When something is free, shortage happens.
Margaret Thatcher liked to say “the problem with socialism is that you eventually run out of other people’s money.” That quote should be displayed on every MP’s desk when the finance minister gets up to present the 2024 federal budget.
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