Government spending—there’s no such thing as a free lunch

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Appeared in the Financial Post, Aug 11, 2022
Government spending—there’s no such thing as a free lunch

According to George Will, longtime Washington Post columnist, contrary to popular and received wisdom, a political consensus exists in Washington, D.C., which is that Americans want a generous welfare state with high levels of government spending—but they don’t want to pay for it. While not as longstanding, there appears to be an equally strong consensus developing in Canada for more government spending without more taxes.

The U.S. federal government last balanced its budget in 2001. The latest 10-year projection by the Congressional Budget Office (CBO) confirms Will’s assertion and forecasts federal spending at 23 per cent of GDP, which is “high by historical standards.” At the same time, it estimates the annual deficit from 2023 to 2032 will average $1.6 trillion and reach 6.1 per cent of GDP by 2032, the seventh-highest deficit since 1946. And the CBO’s latest long-term forecast projects the U.S. federal debt will reach 185 per cent of GDP by 2052. Simply put, Americans want Washington to spend a lot but not impose concurrent taxes, which means they’re willing to borrow to finance their spending.

Here at home, Canada enjoyed more than two decades of economic prosperity starting in the mid-1990s or so, based on the exact opposite policies—lower levels but better prioritized government spending, balanced budgets and declining debt, and tax relief. The recession of 2008-09 was likely the starting point of the unravelling of that consensus, however, and the federal election of 2015 was a point of demarcation for a new consensus.

The Trudeau government introduced a policy of purposefully borrowing money to finance more spending, and while it promised deficits would be temporary, they remain to this day and are expected for the foreseeable future. The latest federal budget expects revenues to increase from $316.4 billion in 2020-21 to almost $500.0 billion by 2026-27, an increase of 56.8 per cent. Despite this avalanche in revenues, Ottawa expects to run deficits every year, with the national debt reaching nearly $2.0 trillion in 2026-27.

And it’s not just Ottawa. Ontarians, for instance, recently returned the Ford Progressive Conservative government back to office with 40.8 per cent of the popular vote and 83 seats, a dominant majority. The Ford government essentially ran on its 2022 budget, which called for increased spending and borrowing. Despite a surge in revenues, the province estimates a nearly $19 billion deficit for the current year—not including spending on infrastructure, hospitals and schools—which brings borrowing to $41.5 billion this year. It also acknowledges that both debt and interest costs will increase over the next few years as a result of the Ford PC plan.

This preference for more spending while avoiding the costs (i.e. higher taxes) was highlighted in a May 2022 poll, which asked Canadians whether they support new national programs. The results indicated widespread support for national daycare (69 per cent), pharmacare (79 per cent) and dental care (72 per cent). However, the poll also asked respondents if they support the new programs (and spending) if they were linked with GST hikes to pay for them. Support plummeted from 69 per cent to 36 per cent for national daycare, 79 per cent to 40 per cent for pharmacare, and 72 per cent to 42 per cent for dental care.

Canada’s experience with wanting more government spending without higher taxes, which lasted roughly from the mid-1960s to the early-1990s, resulted in a near currency and debt crisis until governments across the country and of all political stripes adopted a different consensus, which lasted more than two decades and coincided with general prosperity. Canadians should seriously rethink the emerging consensus of wanting more spending but not paying for it. It won’t end well as there’s no such thing as a free lunch.

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