Thank you. I hope I've unmuted myself successfully.
I would like to start by recognizing Paul Rochon’s admirable service as deputy minister of finance for six years in the most trying of circumstances.
The fall economic statement suffers from cognitive dissonance, or what George Orwell in 1984 called “doublethink”, since it requires believing two contradictory ideas at the same time. On the one hand, its projections of government spending and deficits paint a picture of few long-term effects from the pandemic. At the same time, this benign long-term outlook is based on the assumption that interest rates stay low due to subpar growth for years to come.
Despite the pandemic’s unprecedented shock, government finances are forecast to essentially return to where they started. After doubling this year, the total government spending as a share of GDP in 2025 falls to 14.5%, slightly below where it started in 2019, despite a near doubling of debt in the intervening years. Government revenues are projected to rise about half a percentage point of GDP. As a result, the federal deficit as a share of GDP in 2025 is projected to be only marginally higher than it was in 2019.
However, this forecast of the negligible impact of soaring cumulative debt on annual deficits assumes that interest rates stay at record low levels and that higher government spending is temporary. The bond market says unequivocally that economic activity will remain subdued for a prolonged period. The fall statement does recognize that the pandemic lowers our potential GDP by $50 billion by 2025, yet despite slower potential growth and an aging population, government spending magically is not affected.
While markets have priced in an extended period of low interest rates, the fall statement ignores the effect on our financial and pension systems. Clearly, low interest rates have a significant impact. Most pensions are based on actuarial assumptions of real interest rates of 2% to 3% over the longer term, much higher than they have been for years.
The December 2019 fiscal update from the Department of Finance acknowledged the negative impact of the lower interest rates on its own employee pension plan. That update revised up the deficit partly because of “increased expenses related to actuarial revaluation of employee pensions”, totalling $33.4 billion over the next five years. This is only one of the many distortions caused by ultra-low interest rates, yet there is no discussion of the impact of lower interest rates on the viability and the risk-taking of pension plans.
The fiscal update acknowledges other ways that this recession differs from any seen before and has lasting consequences. It shows, on page 52—which Jack also was drawn to—the rising share of permanent layoffs in unemployment as the initial shock of the pandemic wears off. Jack has already covered that, but what I'll say is that the essence is that temporary layoffs accounted for 86% of the unemployed in April, and by October unemployment fell by more than half, but the share of permanent unemployment rose to 74%.
These data give an idea that the recovery inevitably was going to slow in the fall and winter as the rapid recovery of industries that easily adapted to social distancing gave way to the much harder case of other industries largely shut down as long as the virus circulates.
The document whitewashes policy errors made early in the pandemic as it attempts to repackage measures clearly intended for short-term relief as long-term stimulus. Canada is running the largest government deficit in the G20 because Canada enhanced household incomes more than any other nation. Much of Canada’s extraordinary increase reflected that benefits were poorly targeted, including 27% going to households that earned over $100,000, according to the Fraser Institute.
Not surprisingly, much of this money ended up being saved. However, rather than acknowledging that income support was excessive and poorly targeted, the fiscal statement labels these savings as “preloaded stimulus” and claims that “unleashing these savings will be a key element” of the recovery, as if that was the plan all along. This improvised rationale—it cannot be dignified as a plan—is problematic.
Still, the worst damage from the pandemic may well be on how we think and talk about the economy. Recall the uproar in 2015 over preliminary estimates of GDP falling 0.1% and 0.2% because of the oil price shock. This sent much of the commentariat of this country into a frenzy about whether the economy was in recession and led some to insist that we needed to run deficits to lift growth at least temporarily back into positive territory.
Today we are dealing with declines in real GDP literally 89 to 177 times greater, but the same word, “recession”, is used as if the two episodes are equivalent. The only blessing of this pandemic may be that we will be inoculated for years against allowing trivial movements in GDP or jobs to dictate policy.
Words count, and for a lot. Recessions in the 1950s and 1960s were frequent, mostly inventory cycles, but usually did not result in job losses. After the 1974 recession, the public and policy-makers began to associate recessions with major losses of incomes and jobs and, increasingly, did everything possible to delay them. The result was twofold. One was a chronic overuse of stimulus that lowers long-term growth and, ironically, makes the economy more vulnerable to recessions. The other was that recessions became severe once-a-decade events, often involving financial crises that also significantly dampen long-term growth.
Similarly, the increase from a $39-billion to a $381-billion deficit has been made banal in public parlance by sheer repetition. Before 2020, a deficit of even $100 billion was unimaginable, but now many shrug as if it has become the norm. Instead of treating a $39-billion deficit as unusually large, the fall statement holds it up as a satisfactory goal to pursue.
The unrelenting focus on monetary and fiscal short-term stimulus to the economy has been at the expense of ignoring the negative long-term impacts on potential growth. It is little wonder that economists increasingly call slow growth the “new normal”.
Thank you.