Fraser Forum

Expanding government won’t help Canada’s recovery

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Expanding government won’t help Canada’s recovery

Enough signals have been sent by the federal government over the last few weeks for Canadians to formulate reasonable expectations about the upcoming throne speech next month and what might be included in the government’s plan for economic recovery.

Expectations include a likely marked expansion of the federal government through potential new programs such as national pharmacare, national daycare, a new income transfer based on CERB and a host of new “green” initiatives. And if Prime Minister Trudeau keeps his commitment to no new taxes, the proposed expansion will be financed by borrowing. As the evidence has shown, replacing entrepreneurs, businessowners, investors and private-sector workers with a massive expansion in government will dampen, not improve, Canada’s prospect for a strong recovery.

Any legitimate recovery plan would focus on two questions. One, how can policy positively affect the sectors of the economy adversely affected by the recession that are not (yet) recovering? And second, what policy reforms will improve the competitiveness of Canada so the incentives for entrepreneurs, businessowners, professionals and skilled labour also improve?

None of what the Liberals are considering will respond to these questions.

The sectors of the economy that have not yet recovered include food and accommodations, and tourism more broadly, a host of personal services including recreational and cultural that have been slow (or perhaps constrained) to innovate in the face of social distancing and changing consumer preferences, transportation (particularly air travel) and certain professional services. Some of these sectors—air travel, restaurants and certain personal services—likely face difficult paths to recovery given the change, perhaps permanent, in consumer preferences.

It’s hard to see how increased spending financed by debt will provide specific relief or assistance to these sectors. The easiest way to think about the incongruity is how these initiatives would help workers currently laid-off in these sectors.

There’s very little overlap between sectors adversely affected by the recession (that are not yet recovering) and sectors that would receive an infusion of government spending. The flight attendant, concierge, restaurant server, travel agent, etc. will not seamlessly shift to work in the green energy sector, daycare or health care. There’s clearly an incongruity between what the Liberals are considering and what would actually help those displaced by the recession.

The federal spending being considered also ignores two additional effects that will dampen recovery. One, the significant increase in government debt will slow the recovery since Canadians understand that increases in debt mean higher future taxes. The uncertainty regarding taxes, both in the near and longer term, will cause delays (if not outright scuttling) of entrepreneurial and business investment in Canada.

Two, the additional federal spending will increase the overall size of the government relative to the economy. In other words, the government will play a larger role in the decision-making about how best to allocate and use resources in the economy. A wealth of data exist showing that the size of government that maximizes economic growth and social progress (health, education, etc.) is roughly between 26 per cent and 30 per cent, relative to the economy. (That’s all government spending—federal, provincial, regional and local.)

Prior to the COVID recession, all government spending in Canada (as a share of the economy) exceeded 40 per cent. The federal proposals now being considered would increase that significantly, meaning we’re moving further and further away from the size of the government (again as a share of the economy) traditionally linked with the strongest economic growth and social progress.

Put differently, Ottawa is contemplating a larger role in the economy for politicians and bureaucrats coupled with a smaller role for entrepreneurs, businessowners, investors, professionals and workers more generally. Neither the data nor commonsense say this will result in stronger economic growth.