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Federal economic and monetary updates demonstrate there’s lots of room to expand public services for working Canadians

October 31, 2017

5-minute read

After many years of “serial disappointment” and concerns about secular stagnation, Canada’s economy is finally growing at a solid pace, as Finance Minister Morneau and the Bank of Canada Governor Poloz underlined in the recent Fall Economic Statement and Monetary Policy Report.

This has led to higher revenues, lower deficits, and enabled the government to enhance two of its anti-poverty measures, the Canada Child Benefit and the Working Income Tax Benefit.  These enhancements will cost and additional $5.8 billion over the next four years, just one-eighth of the federal government’s expanded fiscal room. More than two-thirds of the $47 billion fiscal dividend from higher growth over the five years to 2022/23 is going to lower planned deficits.

Despite this, some Bay Street economists and politicians argue that the federal government should cut back on its “stimulus spending” so it doesn’t overheat the economy, and that Ottawa should also set out a plan to eliminate the federal deficit soon.

The Trudeau government would do well not to heed this advice. Instead it should fulfill its promises to expand social programs, and strengthen public services. This would not only improve living standards for working Canadians—“the middle class and those working hard to join it”—but also further strengthen the economy.

The economy has grown at a strong pace in large part because of the federal government’s anti-poverty and redistributive measures. In July Governor Poloz credited the Canada Child Benefit as being “highly stimulative” for the economy. Previous orthodox bastions of trickle-down economics, such as the International Monetary Fund (IMF) and the Organization for Economic Cooperation and Development (OECD), now agree that greater equality will lead to stronger economic growth.

While the economy has grown at a strong pace, it certainly isn’t overheating, especially when it comes to labour markets.  Consumer price inflation at just 1.5 percent so far this year remains well below the Bank of Canada’s target rate of two percent.  Despite the drop in the unemployment rate, average wage increases have lagged behind the cost of living for many years and are still barely keeping up with inflation. There’s no sign of wage inflation and in fact unit labour costs have declined this year.  Some sectors may be operating their plant and equipment at capacity, but we’ve been in a prolonged period of business under-investment, and it’s high time they invest in additional capacity.

There’s also a lot more underutilized potential in the workforce. While the jobless has declined, there’s been an increase in the share of people working in part-time, contract, self-employed and precarious jobs. In fact, the gap between Statistics Canada’s unemployment rate and the Bank of Canada’s Labour Market Indicator—a broader measure of labour market conditions—has grown to its largest on record, reflecting low growth in wages, hours worked and still high rates of long-term unemployment.  We need more higher-paying, better quality and higher productivity jobs.  These would bring more people into the workforce and increase our potential economic growth.

The Economic Statement projects that federal program spending will decline from its current 14.3 per cent share of GDP down to 13.5 per cent in five years, with total spending (including debt charges) declining from 15.4 per cent to 14.8 per cent. This decline of 0.6 percentage points may seem small but it will amount to $15 billion in lower spending annually as a share of the economy by 2022/23. Budgetary revenues are projected to remain stable at a 14.5 percent share of the economy.  If the federal government’s revenues were at their long term 50-year average of 16.4 per cent, they would be $40 billion higher this year, and almost $50 billion higher in five years.

While the Fall Economic Statement didn’t set out a plan to a balanced budget, the Parliamentary Budget Office’s Fiscal Sustainability Report released earlier this month concluded that “current fiscal policy at the federal level is sustainable over the long term and that the federal government could permanently increase spending or cut taxes by 1.2 percent of GDP ($24.5 billion in current dollars) while maintaining fiscal sustainability.  The PBO projection doesn’t project the the federal budget to be balanced until 2042, still 25 years away, and for the entire net federal debt to be paid off twenty years later). A revised projection with the recent improved economic and fiscal figures would likely bring the date for balancing the budget forward and show increased fiscal capacity. The PBO projection also assumes fairly significant declines in population, employment and productivity growth over the next two decades. Stronger population and economic growth would result in higher revenues and a much improved fiscal situation.

This means the federal government could increase public spending or reduce taxes by at least $25 billion while maintaining fiscal sustainability—and by considerably more if these measures further boost economic growth.

Where should the Trudeau government focus its attention and additional federal funding?

The hundreds of billions in cuts to corporate, capital gains and higher income taxes over the past two decades have ultimately done little to stimulate investment or growth. Instead corporations still have over $600 billion in accumulated excess cash that they still haven’t invested in the economy.   Progressive and fair tax reform could provide federal and provincial governments with tens of billions more annually to devote to more productive investments.

The Trudeau government has substantially increased federal funding for infrastructure, although much of it is back-end loaded, and expenditure of these funds is often delayed. While the increase in infrastructure spending to date has undoubtedly been positive for the economy, it may have had a weaker short-term economic impact than originally anticipated, perhaps because it hasn’t necessarily had a strong redistributive impact.

The expansion of the Canada Child Benefit and the Working Income Tax Benefit have been positive both for helping those living in poverty and for stimulating the economy. But we also need more significant and transformative changes that will improve peoples lives, increase equality and also strengthen the economy.  One of the top priorities should be to invest more in developing a national, affordable and quality early learning and child care system.  The federal government has committed $7.5 billion for this, but that’s spread over 11 years.  Funding and capacity should be increased much more rapidly.

Quebec’s childcare system has more than paid for itself in economic and fiscal terms in large part because it led to increased labour force participation, particularly of mothers.  The OECD has long urged Canada to invest more in early learning and child care and the IMF also recently suggested that we could increase our investment in childcare to $8 billion annually, and that it would pay off in increased economic activity and tax revenues.  Over the longer-term, every $1 invested in expanding childcare would yield close to $6 in economic benefits, the Conference Board of Canada recently reported.

Another priority should be national pharmacare to provide affordable medically-necessary prescription medicine. The PBO recently reported this could save over $4 billion annually from Canadians’ overall annual spending of $25 billion on these drugs while expanding access, because of reduced costs of prescription drugs. Because provinces, private workplace plans and individuals pay the vast majority of current costs for prescription drugs, this would involve a major re-alignment of funding.

Both a national early learning and childcare program and national pharmacare plan would go a long way to improving the universal public services available for all Canadians. Both would significantly alleviate the major monthly costs struggling families have to bear, would reduce costs for employers and provinces, and help strengthen the economy.

Toby Sanger is the economist for the Canadian Union of Public Employees, based in Ottawa. 

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