Today’s federal fiscal update—that '70s show
Patterns recur in the course of human events. In the case of federal government finances, with today’s federal fiscal update we are about to embark on a path with parallels to the 1970s.
The ’70s represent a structural break in Canadian and global economic performance that saw the end of the post-war economic boom. There was a period of slower economic growth inaugurated by the first OPEC oil price shock of 1973, accompanied by rising unemployment and inflation.
The policy response to these economic challenges was originally framed in a Keynesian economic management framework based on the view that interventionist government could address economic fluctuations via fiscal and monetary policy. Indeed, deficits worsened during this period as government maintained or boosted spending in the hopes the slowdown was temporary. High interest rates stoked debt service costs and the end result was larger deficits and the accumulation of a massive level of debt and ultimately the federal fiscal crisis of the early 1990s.
From 1973 to 1996, federal revenues rose from $23.0 billion to $149.9 billion while expenditures grew from $25.2 billion to $158.6 billion. There developed an enormous gap between federal revenues and expenditures that went from a $2.2 billion deficit in 1973 to peak at a $39 billion deficit in 1992 before declining to $8.7 billion in 1996. In fact, there was a deficit every year from 1973 to 1996 until the federal budget was balanced in 1997 largely as a result of austerity measures. The average annual deficit to GDP ratio was 4.7 per cent from 1973 to 1996. Meanwhile the net debt to GDP ratio rose from 20 per cent in 1973 to peak at 73 per cent in 1995 during the era of the federal debt crisis.
We are currently being prepared for a new era of federal debt acquisition. Preliminary reports in advance of today’s federal fiscal update suggest the deficit will be much larger than originally projected—perhaps even $34 billion. We’re told we are in an era of slow growth and Depression-era economics that can only be reversed by massive deficits that are supposed to kick-start the economy.
Even the governor of the Bank of Canada has weighed in arguing that: “Canada is in a very good fiscal situation, so we shouldn’t be worrying about [deficits] at this time.” The case is made that we can take on more debt because our debt-to-GDP ratio is low, the projected deficits are relatively low as a share of GDP—at about 1.5 per cent—and interest rates are low.
Neglected in this analysis is the fact that unemployment rates are nowhere near the levels they were in the recessions of the 1980s and 1990s. Moreover, the large deficits incurred at both the federal and provincial levels of government since 2009 have not sparked a renaissance in economic growth. And while interest rates are low at the moment, there are signs they may begin to rise igniting the pile of provincial and federal debt like so much fiscal tinder.
Going to back to the early 1970s, the net debt-to-GDP ratio had reached a post-war low at about 20 per cent while the “modest” deficits incurred in 1973 and 1974 were 1.7 and 1.5 per cent of GDP respectively. While interest rates in the early 1970s were higher than today, by post-war standards and what was to come in the 1980s, they were also low. Needless to say, the deficit apologists of the ’70s could also point to indicators justifying larger deficits and more debt based on good intentions that the economy needed stimulus.
The road to fiscal crisis, like the road to hell, is paved with good intentions. This is not the road we want to drive down again.
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