By Theo Van de Kletersteeg
Covid-19 has left few segments of the economy untouched, with hardship experienced by millions of Canadians and thousands of Canadian businesses. It will take many years before we will be able to “erase” the negative economic impacts of this crisis. Covid-19 has fundamentally changed Canada’s domestic policy agendas, as well as the country’s international competitive position.
The crisis occasioned by Covid-19 has possibly cost the federal government more than its combined operating surpluses and deficits of the past fifty years. The government estimated in July that the federal deficit for the year ending March 31, 2021 would be $343 billion. However, not included in the estimated deficit are the tens of billions of dollars of additional support dollars that will need to be spent during the second half of the current fiscal year. Also not included will be the tens of billions of dollars that will be lent to businesses during the period, since these loans will be considered assets, not operating expenses. Gross federal government debt at the end of fiscal 2021 will likely be well beyond $1.2 trillion, and will likely increase steadily as large-scale deficits will continue to be recorded during the next two fiscal years.
Covid-19 has also severely squeezed provincial and municipal budgets, as public transit systems sat idle, healthcare expenses ballooned, government workers stayed home, and tax collections became problematic. These deficits will be financed through borrowed funds, adding a tremendous burden onto the shoulders of both current and future taxpayers. Ontario is currently expected to finish fiscal 2021 with a deficit of $38.5 billion; Quebec is expected to produce a deficit in excess of $15 billion. There is red ink everywhere. The Economist estimates that in addition to the $4 trillion of privately-owed debt by Canadians (the second highest in the world), provincial and municipal governments will owe $2.4 trillion by the end of March of 2021, in addition to federal government debt of $1.2 trillion plus.
The PM has stated that he does not intend to raise taxes to repay significant amounts of Canada’s debt. However, if increasing tax rates will not be the source of funds to repay debt, the only other source of funds is additional tax revenues through growing the economy. But that’s where the problem lies: Canada already had a sizeable (and growing) deficit before Covid-19, resulting from continued high levels of social spending, and a faltering economy weakened by international trade disputes, low Canadian labour productivity, and over-regulation of resource industries resulting in delays or cancellations of major new development projects. If anything, those points of failure still exist, or have worsened. So, given the pre-existing malaise, and an economy that will continue to be on life-support for quite a while, how can we avoid becoming overwhelmed by debt, which would negatively impact our quality of life? We cannot allow today’s and tomorrow’s obligations to the transferred to the next generations. We need to raise taxes and cut services. Plain and simple.
In March and April, Canada lost three million jobs, the worst ever in its history. However, even if the three million jobs were recovered tomorrow, we would still be facing a struggling economy, and we would still have to find ways to deal with the hundreds of billions of dollars of additional debt. What’s the plan to recover from this disaster, and put Canada back on the economic map?
How bad is Canada’s federal debt?
Federal officials, including the PM, have downplayed the high levels of federal debt, saying Canada can easily afford them. They refer to Canada’s debt to GDP ratio as being lower than leading industrialized nations like Japan, the United States and others. This is true, on a gross basis, with Canada’s 2019 debt to GDP ratio of about 90 per cent being well under Japan’s (240 per cent), Italy’s (140 per cent), the US (105 per cent), France (100 per cent) and Spain (95 per cent). However, when the numbers are modified to net results by subtracting financial assets owned by the federal government from gross debts, the International Monetary Fund (IMF) calculates that Canada’s net 2019 debt position was 65 per cent of GDP, exceeded only by Japan’s 73 per cent. That was before the Covid-19 crisis. Now that Covid-19 is in the process of seriously reducing Canada’s 2020 GDP output while heaping on piles of additional net federal debt, Canada will likely lead the “rich nations” of the world in having the highest level of net federal debt as a percentage of GDP.
Although Canadian politicians and economists are eager to resort to use of the debt to GDP ratio to reassure themselves and taxpayers that our debt is not as burdensome as that of other nations, debt to GDP ratios are only useful if the country in question has a proven ability to translate growth in GDP into growth of government revenues and, therefore, an improved ability to repay debt. In Canada’s case, that is far from being the case. In fact, Canada has a poor record of growing government revenues, as is shown in the graphic on page 21, which demonstrates that, over the years, the growth of Canada’s federal debt has far exceeded the growth of federal revenues. Canada has been unable to translate GDP growth into robust growth of federal receipts, partly because, unlike countries like Japan, Germany, Taiwan and South Korea, Canada does not have any corporations that have global dominance in their industries.
Successive past and current governments have greatly encouraged consumption by creating an environment for near-zero interest rates. However, the stimulation of consumer demand has had a number of negative side effects. First, this excessive stimulation drove consumer debt (relative to consumer income) to the second highest in the world, which has created a serious additional risk to the Canadian economy. Secondly, with so much emphasis on maintaining consumer spending, the business side of Canada’s wealth generation agenda was overlooked. Whereas the period from 1995 to 2008 produced erratic, but nonetheless significant merchandise trade surpluses (excesses of export over imports), this positive situation turned around abruptly in 2008. In fact, since 2008 there have only been a few months during which Canada’s merchandise trade surplus was positive. Looked at from a longer perspective, from 1971 to 2020, Canada’s balance of trade was positive by under a billion dollars a month, not much for a country with a GDP of $1.7 trillion.
Canada’s poor international trade performance suggests strongly that Canadian exporters are unable to compete effectively in international markets. High costs, low labour productivity, excessive regulation, international politics, and other factors are all conspiring to make Canadian exporters less competitive. On the flip side, stimulation of consumer demand has stoked imports. We can have trade agreements with every country in the world but, if we are not competitive, we are not going to increase exports. Consistent poor trade performance will result in a lower value of the Canadian dollar, which would increase the cost of imports, and cause inflation.
So what do we have to do?
We must see the crisis as a very long overdue excuse to completely overhaul the way the country is run, and the manner in which economic value is produced. For more than 50 years, Canada has stumbled from one ad-hoc economic “strategy” into another, accomplishing little, and allowing its larger enterprises to go bankrupt, be sold, or decimated by government itself. Witness, for example, how de Havilland’s Avro Arrow was killed by the Diefenbaker government, how Nortel went bankrupt and Blackberry was reduced to a shadow of its former self because governments did not deem them worthy of support. Or consider how Bombardier’s ground-breaking C-Series aircraft became the Airbus A-220. Lastly, let’s consider how governments hemmed and hawed over a few measly dollars that might have saved these companies, and compare them to the hundreds of billions of borrowed dollars the federal government will spend in 2020 to sustain employment and avoid excessive personal hardship.
All governments must take a serious look at reducing the cost of the bloated government operations we have ended up with. Canada’s Treasury Board Secretariat periodically produces updates on federal spending estimates, organized by federal organization. The tables list 128 organizations and identify fiscal 2019 actual net expenditures, with estimates for 2020 and 2021. The organizations listed are not exhaustive: organizations that are profitable are not listed, and organizations that report to other government organizations are also not included.
There are hundreds upon hundreds of organizations that receive a share of the federal budget year after year. Some are relatively small, while others are large. I have taken a detailed look at some of the organizations mentioned, and found many examples of funding that in the past was taken for granted, but which should be examined far more closely if we are ever to achieve a more cost-effective government:
VIA Rail required more than $500 million of support from the federal government in 2019, including $280 million to cover operating losses. In 2019 VIA Rail’s revenues totalled $388 million, but it lost $$280 million, meaning that, on average, taxpayers subsidized 42 per cent of the cash cost of a ticket. Is that reasonable? No, of course not. If you travel on VIA Rail, you should do so at your expense, not the taxpayers’. So, either close VIA Rail, or reorganize it so it will not require any subsidies from taxpayers. Better still, sell it to a private operator.
Atomic Energy of Canada Limited (AECL) produces annual revenues of some $75 million, but needs additional annual subsidies of about $1 billion to carry out its mandate. Most of the subsidies are spent on decontaminating and remediating AECL’s legacy nuclear facilities which were used in support of developing AECL’s unsuccessful heavy water design of nuclear power stations. Federal taxpayers have made large contributions to AECL over the course of its history, and are “on the hook” to pay for cleanup expenses that will reach well into the future. One external report identifies $13 billion as the level of funding AECL received in federal contributions (over and above commercial revenues) from the early fifties to March 31, 1995. Although future federal contributions are expected to slow down, they were as high as $1.2 billion during the 2020 fiscal year.
Unfortunately, federal taxpayers will probably need to subsidize AECL’s ongoing cleanup activities for decades to come. In addition to its cleanup and waste storage operations, AECL is in the process of developing Small Modular Reactors (SMRs) for use on-grid and off-grid in small and/or remote communities, for introduction around 2030. AECL anticipates spending about $200 million annually on this development, and hopes to address a potential global market of $150 billion between 2030 and 2040. Given AECL’s track record of “forever” dependence on taxpayers, have credible and impartial management consultants ever confirmed the possible existence of such a market? Moreover, with the cost of wind and solar power having decreased dramatically during the past decade, what is the attraction of deploying technology that may “forever” be dependent on further public spending to decontaminate the corporation’s original sites, as well as be potentially liable for the safe storage and cleanup of future customers’ sites? Regardless of the scientific achievements that may be possible, perhaps AECL’s role should be reduced to dealing with past contamination only. The commercial benefits of its “new and improved” line of nuclear reactors appear to be dubious, and taxpayers don’t need a future mountain of debt to clean up nuclear waste……..If SMRs represent a winning power source for the future, AECL should be able to line up strategic partners to complete the development, and fund international marketing efforts. Given AECL’s disastrous past, this organization is not an appropriate spot for taxpayers to invest in.
Canadian Broadcasting Corporation has required $1.2 billion in annual subsidies from Canadian taxpayers during each of the past few years to remain in business. Bell Media, which operates a similar network of radio and television stations across the country, operates at a profit. Should we not expect CBC to reorganize its affairs in a manner that does not require support from taxpayers?
Canadian Border Services Agency consumes $2.2 billion of taxpayers’ money annually. Perhaps the time has come to make travellers, shippers and recipients of commercial goods pay fees for the services they receive, which would reduce the expense level that taxpayers should be responsible for?
Correctional Service of Canada costs taxpayers $2.6 billion per year to operate. We should find ways of making convicted criminals help pay for their own incarceration, by laying claim to their assets and incomes.
Similarly, Canada Department of Citizenship and Immigration costs taxpayers approximately $3 billion annually to operate. Why not charge immigrants more for the cost of processing their applications, and charge Canadians a lot more for processing passport applications? If you don’t travel and don’t immigrate, why should you have to pay for these services?
The above are merely a few examples of how $320 billion (2019) of taxpayers’ money was spent. You get the drift: a lot of money is being spent on dubious causes. All make Canada less competitive. Sunny ways are great when the sun shines benevolently, and everything goes our way. But, right now, after decades of living without a plan, our international competitors have already eaten our breakfast, and are nibbling at our lunch. Then, out of nowhere, a pandemic appeared that has put Canada in a very serious financial predicament. Although governments always hope that problems will simply go away, this one won’t – we need to find solutions.
A national economic plan
Canada’s relative prosperity is determined by its ability to export quality goods and services that foreign buyers want to buy, and by its ability to attract foreign capital. Both of these determinants of prosperity have been impaired, which makes it imperative for Canada to act. Our ability to export has been impaired by decades of low labour productivity growth, well below that of our international competitors. This is an important issue which, if allowed to persist, will cause further damage to our international competitiveness. Another problem area has been access to foreign capital. For a country that competes for foreign investors with a much larger country next door, it is difficult to convince foreign investors to invest in Canada, rather than the US. Accordingly, Canada must rely on its unique advantages to attract foreign capital, and that’s where things have fallen off the rails. Canada’s energy industry has always been at the forefront of inbound foreign investment. However, ever-tightening regulation of the industry, and unclear government policies have resulted in significant foreign disinvestment in the Canadian energy industry.
Canada has never developed a national economic strategic plan and, as a result, has never achieved the transformation from resource-focused to “knowledge-based” even though over the decades numerous academics have called for such a transformation. Companies that made significant forays into non-traditional industries, such as de Havilland, Blackberry, Nortel and Bombardier, either met completely unsupportive governments, or governments that lacked the courage to do what was necessary to propel these companies forward. On the other hand, one large-scale successful transformation did occur involving the execution of appropriate government policy, which was the privatization of Canadian National, which resulted in the transformation of a perennial money-loser into North America’s strongest rail carrier.
Covid-19 and its resulting run on the treasury put Canada in a financially disastrous situation. Canada is by no means alone in this position, but that does not make this position any more enviable. What is at stake is our future ability to pay for pensions, and to provide national healthcare. From a long term point of view, our social safety network is at risk.
It should be evident to anyone that when the federal government’s expenses for fiscal 2021 are expected to exceed its revenues by about $340 billion, and gross federal debt is more than four times expected revenues, no amount of financial engineering or low interest rates is going to rescue us. It may be possible to escape the immediate consequences of poor financial management, but sooner or later things will catch up with us. Eventually, the government will have to sell assets, tax a lot more, reduce its expenses, or all of the above. Typically, as with ordinary individuals, once you allow yourself to descend down this hole, chances of a reversal in fortunes are slim. Which is why it is crucial that Canada develop a national economic strategic plan while we still can, and start making the necessary investments to implement it.
A national economic strategic plan should focus on Canada’s strengths to identify major future economic opportunities to help sustain Canada’s prosperity. Regardless of what such specific future economic opportunities may be, there will be a few unalterable, essential inputs to that plan which we should be able to agree on early on, before agreement will have been reached on the economic opportunities of the future. Immigration and education, as well as finances, lie at the center of a national economic strategy. I will conclude by making a few comments on these critical components:
Immigration. Canada’s current policy is to increase the current population of 38 million by about 300,000 annually through immigration. In the future, I strongly suggest that Canada focus on immigrants who are likely to become active in Canada’s knowledge-based economy. We need individuals who should integrate well, and who are technically qualified in areas of the economy that Canada believes will become pillars of future growth. We should also encourage immigration of individuals who have experience in building international commercial networks, and entrepreneurs. Our economic future does NOT lie in industries that pay minimum wage, and we should therefore stop immigration of people who do not possess the skills that are necessary to participate in Canada’s knowledge-based economy.
Education. To the extent that I am aware, Canada has made major positive steps in skills training and certification of trades. However, our universities still do not respond well to the needs of the job market. Billions of dollars are being spent at Canadian universities annually, with most graduates earning degrees that have dubious values for the Canadian economy. I therefore propose that government financing of universities be redirected in such a way that studies toward scientific, medical, and engineering degrees be paid for in their entirety by governments, including expenses for residency and necessary travel, to students who achieve and maintain high levels of performance, and who pledge to remain in Canada for X number of years following graduation. On the other hand, studies in most Arts and Business programmes should no longer be paid for, or subsidized, by governments.
Whereas in the past, Canada’s economy was more diversified, today pressure is building on our energy industry, and the auto industry. These are big ones, and further deterioration in their prospects would have a material negative impact, particularly when Canada’s finances have suddenly become over-stretched. Thus, we must look seriously at new economic opportunities.
For example, could Canada become a major player in hydrogen energy, and transportation based on hydrogen fuel? (see article on page 23) Why not! We have abundant natural gas, water, hydro-electric power, and a well-established international supplier of fuel cells (Ballard Power). What we need in addition to that is a business plan that builds on national alliances, top notch management, and billions of dollars. Availability of the latter was once a major obstacle but, given the plethora of Canadian investment funds, should no longer be.
Or, how about battery technology for automotive applications, and alternative energy storage? We have a leading supplier of such batteries in our own backyard (Electrovaya). Technology developed by this company dispenses with dangerous chemicals used in the traditional manufacturing process, and enables a number of productivity-enhancing features for users. All it needs is money.
We need to think out of the traditional boxes. We need good ideas, we need inspired people who are committed to infusing Canada with innovation, and we need money, lots of it. Canada transformed itself in no time in the early forties to support the War effort, and its efforts helped change the German and Japanese onslaught. We are faced with similar threats today. The dangers are not as imminent as they were in 1940, which provides us with a bit more time to get things right. But we’d better get going developing a plan. If we don’t, Covid-19 will go down in Canada’s history books as the catalyst that sealed the country’s fate as an irrelevant global competitor.
Although I would like to be optimistic, I fear that the government’s largesse to deal with the impacts of Covid-19 has put Canada on the path to impoverishment. We have purchased nothing for the $450 billion plus of Covid-related expenses the federal government will spend during the current fiscal year. Had Canada had a strategic plan in place, a good portion of this money could have been spent on innovation-related business activities, which would have improved the country’s future competitive position. Instead, we borrowed ourselves into oblivion, and we have at least another year of outrageous expense levels to go through. All of this money, which in the aggregate will represent several times aggregate annual government expenditures in normal times, will literally be flushed down the drain, with no lasting positive impact to show for it. We have no new businesses to show for it, no wave of innovative new products. Instead, we have created even greater dependency on government which, by any rational financial measure, is now insolvent, only rescued (for now) by its ability to print money. As if that’s not enough, through near-zero interest rates, our federal government is actively encouraging a financially-weakened population to take on more consumer debts. In my neck of the woods, housing prices have increased dramatically, and no house is being sold without a bidding war. Meanwhile, CMHC sits on a huge, huge pile of loan guarantees in favour of banks that provided large mortgages to pay for homes purchased at sky-high prices by non-creditworthy home buyers. Guess who will ultimately be on the hook for those guarantees if the housing market were to take a nosedive. Yes, you guessed right. There is no good reason to be overjoyed about Canada’s economic prospects these days…..