Madam Speaker, I will be splitting my time with the member for Hochelaga.
Ironically, I had occasion to repair my deck. Normally I would ask somebody else to do it, but these are strange times so I thought I would apply my formidable carpentry skills to the repairs. To no one's great surprise, it is clear that I should try to keep my day job.
While my lack of carpentry skills should not be a shock, the price of lumber certainly was, as was raised in a previous exchange. It cost 51 bucks for a 16-foot cedar deck board, which is three times last year's price. I considered myself lucky to get any after phoning four lumber yards, two of which had nothing at all. Now my simple job was going to cost me 75 bucks for a four-by-two square in materials alone. If I was intending to replace the entire structure, I probably would have had to put a mortgage on the house. Mortgage money is really cheap these days, which underlines the real estate frenzy that the previous exchange outlined.
Cheap money is also the underlying assumption of this budget. The related assumption is that the Bank of Canada can keep its commitment to an inflation target of below 2%. The government and the Bank of Canada are backed up by the best economists in Canada. They provide consensus opinions to the Minister of Finance and the governor of the Bank of Canada upon which all projections are based: GDP projections, nominal GDP projections, inflation projections, interest rates, etc.
Everything starts and ends with consensus numbers. Those allow the government to know what its revenue will be and, in turn, its deficit projections. However, what if the experts are wrong and have been measuring the wrong things? The basket used to calculate inflation is made up of quite a number of goods and services, some of which are questionable in a pandemic economy.
For instance, no one is travelling these days, so travel is actually deflationary, along with all of the related services and goods that go with travel. My deck board, on the other hand, or a trip to the grocery store is exactly the opposite: It is quite inflationary. In normal times this all balances out. However, these are not normal times and we need to be more than a little skeptical about these predictions.
In a November article in The Globe and Mail's Report on Business, the writer took on the post-March pandemic predictions of the leading economists and this is what he found.
Canada's best economists predicted, first, that there would be a significant weakening of the Canadian dollar. The reality is that a brief hit was followed by a full recovery. The second prediction was that equity markets would take years to recover. The reality is that markets took months to recover and they have been on a tear ever since, with what some might even call “irrational exuberance”.
Third, the GDP would plunge. In reality it did plunge, but it recovered quickly and with not much ground to make up to pre-pandemic levels. In fact, colleagues may have caught reports by the Bank of Canada that are revising GDP growth up to 6.5%, which is higher than the government's predictions as of Monday, so things are changing rather quickly. Fourth, housing starts would plummet. The reality is that housing starts are thriving and the real estate market, some say, is insane.
I appreciate that these are challenging times, but apparently being an economist means never having to say they are sorry. Colleagues might say that I am just ranting about economists, and that might be a little bit true, even if economists are some of the nicest and smartest people I know. The fact remains that at this time last year, some of the nicest and smartest people I know got it far more wrong than right. That puts the Prime Minister and Minister of Finance in a dodgy position. Spending demands far exceed the ability of the economy to support them. It is one thing to provide emergency support, but it is quite another to provide that support over the short or medium term. It is simply not sustainable.
I do not know what a 1% interest rate jump would do to the budget, but I do know that 2% would probably be quite devastating.
Many decades ago, I was doing mortgages for my legal clients in the 17% to 18% range for five-year fixed rates. I wish I had had the foresight to load up on long-term Canada savings bonds at 13%, however I did not. I do not claim any unique insight, but to those who claim it could not happen again, I say “think again”. I remember the inflation wars of the seventies and eighties, or “stagflation” as I suppose it was called at the time. I remember wage and price controls. I remember Canada being an honorary member of the third world. I remember the draconian financial disciplines of the nineties and early 2000s. I remember the banking crisis of 2008-09, where financial institutions were severely overleveraged and CEOs were buying fancy financial instruments that they did not even seem to understand. I also remember the wise words of Ed Clark, former CEO of the TD Bank, who said he would not buy anything for his bank that he did not understand. That is good investment advice.
We are in a time when no one really knows what is going on or will go on. I did not read the last year's predictions to embarrass some people; I read them to remind everyone that we are in perilous times, and as long as the pandemic remains in our midst, economic prognostications, even consensus ones, cannot necessarily be relied upon. The question has become, “has the Government of Canada taken us too far to a step to the abyss?”
A little history might provide some comfort, however. In 1946, immediately post-World War II, the net debt-to-GDP ratio was 110%. Some eight years later, by 1954-55, it was down to 38%. It was largely reduced by tight spending and a prosperous and expanding economy. By the 1975-76 fiscal year, it was down to 14%. Then it took off to the point, in 1996-97, where the debt-to-GDP ratio was 67%, and it was considered by all, particularly the economists, to be unsustainable. We remember the New York Times article about Canada being an honorary member of the third world. With fiscal and monetary discipline and an expanding economy, the government of the day was not only able to bring down the debt-to-GDP ratio to below 30%, but the government actually paid of $100 billion in actual real debt. I would note that fiscal targets were set and a contingency fund was created, so that everyone knew the plan. The 30% debt-to-GDP ratio has hovered there ever since 2006 to 2018. While history may teach us something, it does not teach us everything. We may be in the immediate post-World War economy, or we may be in something else.
I think I have said enough about what I think about economists' predictions. The other unknown is how the virus will behave. It has demonstrated a devastating resiliency, attacking populations that were once thought to be safe, so it is hard to know whether we have reached an armistice with the enemy or there will still be a full-on war or just a few battles left to mop up.
The finance minister is making a series of what I would argue are reasonable bets. One is that the economy will grow its way out. She has some evidence to support her position. As I indicated earlier, the Bank of Canada yesterday revised its expectations for the growth of the economy upwards quite dramatically, even higher than what the projection was set out last Monday by the finance minister. The second bet is that inflation is still within the band. I am a touch more skeptical, for reasons outlined above, but it is not an unreasonable assumption, and one of the monetary tools left by the Governor of the Bank of Canada to keep the expansion of the economy going. The third bet is that short-term interest rates will remain low. How long is short term? I am not quite sure, but I am, again, a little skeptical about that.
The fourth is that the fall deficit projection of $382 billion came down to $354 billion, which is quite true, and did show some evidence that the government's plan was working. The fifth is that the government—