I thank the committee for inviting me to appear. I will just note that I don't represent anyone because I don't consult to anyone or anything anywhere. I'm merely a poor professor.
Today, I will focus on only one issue in this mammoth budget implementation bill, and that's the federal deficit of the Government of Canada.
I'm old enough to remember the previous time that the federal government had a balanced budget—in the early seventies. The justification then was the same it is as today: Canada had a large, robust and growing economy that could readily finance the deficit. Indeed, we did, and we do.
This was the seventies, when the boomers were young, there were millions of us and the economy was growing incredibly rapidly. However, as our spending ran ahead of our revenues and government deficits started to grow, inflation crept into the economy and became embedded—or “anchored”, as the governor would characterize it—and the Bank of Canada and the Federal Reserve started to increase interest rates. Rates peaked at 20% when I was a mortgage manager at BMO, one block from here, which is now the building owned by you people for your receptions, the Sir John A. Macdonald Building.
Nonetheless, due to the magic of compound interest, the monetary intervention—which it was—to embedded inflation of around 15%, while brutally effective at killing the metastasizing cancer of inflation, did not address the compounding, rapidly escalating federal debt in Canada, or in the States, for that matter. That required a second massive government intervention 15 years later, a fiscal intervention, which was the unprecedented and largest downsizing in Canadian history—by the Chrétien administration—in laying off 80,000 people.
Both were essential responses to the emergence of deficits that were added to and compounded the national debt and that drove inflation upward and then caused negative blowback from the capital markets, bond markets, currency markets and investment markets.
The purpose of this very brief walk down memory lane is to remind parliamentarians that those who argue that federal deficits are of no concern—because Canada is a very large modern economy with a printing press called the Bank of Canada to print money if necessary—do not fully recognize the danger of compound interest, or sudden unexpected recessions requiring major new government stimulus, or the reaction of capital, currency or investment markets to governments that become heavily indebted. Andrew Coyne developed these arguments more fully in an op-ed about two weeks ago.
However, the strongest rebuttal to my arguments is provided by this response, “Yes, Professor Lee, you're correct about the seventies through the nineties, but that was then, this is now, and those conditions no longer pertain.” This is absolutely correct, and I will now turn to the following.
Indeed, the past 40 years or so were wonderful for most of us, with steadily increasing wages, an increasing standard of living, increasing prosperity, increasing levels of education, and improving health care. Life, at least for the boomers in Canada for the last 30 to 40 years, has been a beach, but now we face dramatically different times than the seventies, times that are much more bleak and foreboding.
The most obvious threat to Canada and the entire western world is the aging crisis, which the IMF has stated in writing will dwarf and greatly exceed the cost of the 2008 financial crisis by many magnitudes. Per the OECD, the dependency ratio in 1968 of seven workers to one retiree will collapse to less than two and a half workers to one retiree. Today, Florida has the largest average age population of one in four over 65; within approximately 20 years all of North America is going to look like Florida, without the nice weather.
The second related problem of the aging crisis—and this really affects all of you in this room—as confirmed by numerous OECD, IMF and scholarly studies, is that economic growth that generates the tax revenues that Parliament spends is going to decline significantly going forward, at around a 1.5% decline in GDP annually. This is going to reduce the tax revenues available to governments and your degrees of spending freedom.
It gets worse. As the PBO demonstrated in a fiscal sustainability report of only two weeks ago—and this is a direct quote—current provincial government expenditures “are not sustainable” over the long run. In the not too distant future, the numbers demonstrate—as I have predicted on CBC and elsewhere—that the Parliament and the Government of Canada will be called upon to bail out or assist the Government of Newfoundland and Labrador, and/or the Government of New Brunswick.
Per the latest Newfoundland and Labrador budget statement of this year, that government and its 500,000 residents now owe a net debt of $15 billion, and the Muskrat Falls bills are not fully paid or haven't flowed in yet. By contrast, the City of Ottawa—I know it's not a province and I recognize that, but we're all in Ottawa and I had the numbers at my fingertips—and its one million people, twice as many as Newfoundland and Labrador, owe $2.5 billion in net debt, with about half of the LRT already funded.
I'm not picking on Newfoundland and Labrador. As the PBO said, none of the current expenditures of any of the provinces are sustainable. For those who object and say that I don't understand that provinces can't go bankrupt, I am not discussing bankruptcy, which is a legal concept. We are discussing solvency, which is an accounting concept. Can the province pay its bills as they become due? Puerto Rico today is insolvent; it is not bankrupt. Detroit was insolvent for many years before it finally became bankrupt.
As I assume that no parliamentarian will realistically refuse to bail out an insolvent province and its people, how will each of you respond to such a request if it means—which it likely will—killing some of the federal projects you want financed? This means we must confront the question of whether we should, can and ought to continue to add roughly $20 billion year after year to the national debt of Canada, which is reducing our degrees of future spending freedom, while knowing, if we are going to be honest, that bailout demands from some provinces are on the near horizon and will be on your desks in the relatively near future—I predict within five years.
In the words of John Donne, do not ask for whom the bell tolls; it is tolling for thee.
Thank you.