Thank you. It's always a pleasure to speak in front of this committee.
We are living through the fastest-moving crisis of our time, surpassing previous shocks such as the 1998 ice storm, the 9/11 terrorist attacks and the great financial crisis of 2008. It is worth recalling that these shocks were unprecedented, yet we found the resources, wisdom and strength to overcome each of them.
The federal government is increasing spending at the fastest rate in its history. This is arguably an appropriate and largely unavoidable response to the massive disruption of our economy. Canadian households and businesses need quick access to funds if they are going to survive financially until the suspension of normal economic activity ends, yet the imperative of dealing with the current crisis cannot blind us to their long-term effects. It is not widely appreciated that macroeconomic policies to buttress demand in the short run are harmful to potential growth in the long run. We can see this already playing out in the response to the current crisis.
Canada entered this crisis already in a vulnerable state because of its excessive accumulation of debt over the past decade by all sectors of the economy. Our highly cyclical economy and past experience with unexpected shocks should have bred a more cautious approach to savings and borrowings. Already, federal government debt is exploding. The Parliamentary Budget Officer, last week, projected the deficit would surpass $100 billion, even before the wage subsidy of at least $70 billion and bailouts of hard-hit industries.
These projections are not likely to prove to be very accurate. Economic forecasts are made using abstract models that do not incorporate knowledge of local conditions, and they routinely underestimate the impact of events such as the 2008 financial crisis or the coronavirus today. This fallibility is seen in the unemployment insurance claims in the U.S. Economists forecast an increase from 3.3 million last week to 5 million this week, but claims actually soared to 6.6 million. Worse, economists expected U.S. payrolls in March to fall by about 100,000 when they actually plunged by 701,000. The failure of economists to understand how quickly and severely the economy is contracting implies government spending will increase much more than anticipated, while the loss of revenue is being underestimated.
Moreover, there will be other demands on the federal government. Low interest rates are making pension plans for employees increasingly problematic in the public sector. Remember, as recently as last December the federal government raised its estimates of the federal debt substantially because it finally began to acknowledge that low rates of return on pension assets would force the government to subsidize federal pensions. The full amount of this subsidy has still to be publicly acknowledged and is rising as bond yields further decline.
Provincial government revenue losses are likely to be especially severe. They rely more on sales taxes, which are suffering from unexpectedly sharp declines in the usually stable services sector, even as the provinces bear the brunt of soaring health care costs. Undoubtedly, this will lead to even more demands on the federal government.
Soaring government debt adds to the massive bill we are passing to future generations, when we know that government debt was already poised for steep increases as our aging population puts increasing demands on our pension and health care systems. Generational conflict was already being fuelled by the policy of low interest rates, which are now approaching their zero lower bound. Low interest rates already have helped price housing out of the reach of many adults in Toronto and Vancouver.
There are other impacts on younger people from actions taken to combat the virus. Suspending classes, likely for the rest of this school year and possibly beyond, will harm learning because home instruction is unlikely to be as good. Meanwhile, about 250,000 university students are about to graduate and enter a labour market that has dried up overnight. There is substantial research that cohorts who enter the labour market during recessions suffer a lifelong loss of earnings that is never fully recouped.
Hopefully, we will not often hear the slogan, “Never let a crisis go to waste”. History is littered with examples of rash decisions made during a crisis that aggravated the problem in the long term. The Iraq war following the 9/11 attacks comes to mind. In Canada, invoking the War Measures Act in response to an imagined FLQ insurrection was a blatant mistake.
The same is true of economic crises. The federal government used the stagflation of the 1970s to intervene in the economy on a vast scale, culminating in wage and price controls and the national energy program, both of which are now completely discredited. More recently, the Ontario government adopted the Green Energy Act in response to the great recession, a misguided foray into industrial policy that resulted in a doubling of electricity rates, ballooning government deficits and chronically slow growth. It is worrisome that some of the architects of that policy are today advising the federal government.
Parliament should be wary of schemes hatched by the civil service to permanently expand government program spending during a crisis. One study of social policy concluded that the rapid expansion of the welfare state in the 1950s was not a response to public demand but played on widespread fears of a return to depression after World War II ended. Their “genesis, formulation, justification, and, of course, implementation all occurred within the state and as a result were the handiwork of key policy actors.”
The frenzy of a crisis atmosphere makes it seem worth taking risks with both state power and public money, although once a government program begins it is hard to end. One example of how permanent a temporary government program can be is the U.S. Congress raising pensions in 1958 for civil war widows, nearly 100 years after the war ended.
Canadians want a return to their normal lives as quickly as possible, not a permanent expansion of government spending programs. Already it may be hard to roll back higher tax credits for low incomes, while the drums are beating in some quarters to convert the $2,000 CERB grant into a permanent guaranteed annual income for all. As soon as possible, we want to restore the efficient allocation of credit to the—