Canada’s worst fiscal crisis in generations is brewing
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Summary
Bill Robson is an economist and the President and CEO of the C.D. Howe Institute, a think tank based in Toronto that looks at fiscal matters. In this episode, we take a look at the fall economic statement, the latest update from the Finance Department on Canada's finances, and ask the question: Are we in good shape or bad shape?
Transcript
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First of all, we are a government that has always exercised fiscal restraint.
00:01:25.460
Prime Minister Justin Trudeau trying to pull a fast one on us, you might say.
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He's trying to claim that his government, which has been in power for a full eight years now,
00:01:42.580
This week on the podcast, we're going to take a look at the fall economic statement,
00:01:53.140
This is a government that was elected in 2015 at a time when Canada had a surplus,
00:01:59.300
at a time when the Trudeau liberals said it was a good time to spend.
00:02:04.520
Justin Trudeau in that 2015 campaign said that Stephen Harper was pushing austerity,
00:02:09.900
even though spending back in those days was still growing higher than it should have.
00:02:13.960
But he got elected promising just four small deficits of $10 billion a year each,
00:02:26.660
And if you look at the forecast that were released in the fall economic statement,
00:02:29.600
it is a long way off before we will ever come close to balancing the budget.
00:02:34.720
In fact, in the latest statement, the government has decided that between the budget that came
00:02:40.620
out in the spring and the fall economic statement, that in the coming fiscal year,
00:02:45.100
we will spend $10 billion more, $519 billion in total.
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About $6 billion of that extra $10 billion in spending is just going to service the interest
00:03:02.040
That's like the interest payment on your monthly credit card.
00:03:15.280
He is a man who knows how to look at all of these numbers.
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Howe Institute, a think tank based in Toronto that looks at fiscal matters.
00:03:26.500
It's also named after a well-known, well-renowned liberal finance minister who might have looked
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askance at the current state of Canada's finances.
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I wish we were discussing something more cheerful than federal government finances.
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I do this as someone that's covered politics for a quarter century.
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Howe Institute, named for a renowned and esteemed liberal finance minister from many
00:04:07.260
When you look at what the prime minister said about we're a government that's always believed
00:04:11.340
in fiscal responsibility, and then you look at what they brought out with the fiscal update
00:04:20.040
I don't think this government takes public finances all that seriously.
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And it sounds like a very sort of casual and maybe even a kind of unprofessional thing
00:04:32.680
But we have to look at the projections we get nowadays, including in the fall economic
00:04:40.960
statement, with some wisdom of what we've learned from the last few years.
00:04:47.700
And what we've learned from the last few years is that the projections that we see in each
00:04:52.340
individual federal budget or fall statement are almost immediately overtaken by events.
00:05:00.100
And I am confident that between now and the spring budget, there will be new spending
00:05:08.640
I think that after the spring budget, we'll see some new projections then, and then there
00:05:17.440
And so in between the various fiscal updates we've had since before COVID, but now that all
00:05:24.300
the COVID measures are kind of behind us, we've just seen federal spending projections growing
00:05:32.100
Since the end of 2019, more than $100 billion has come into the projections for the upcoming
00:05:39.520
And so when I see these projections, I just say, well, you know, we have to talk about them.
00:05:45.440
We have to kind of take them on their own merits.
00:05:47.740
But when it comes to things like, you know, what's going to happen to the budget balance
00:05:51.580
is the ratio of debt to GDP, which the government has said is a really key indicator for them.
00:05:59.980
I have to reserve judgment on that and say, you know, we just haven't been able to rely
00:06:06.820
And so it's hard to say we should take these ones any more seriously.
00:06:10.580
Well, you get the budget in the spring, you get the fall economic statement, and I think
00:06:17.960
it was in the last budget, which was supposed to be, by this government's measures, an austerity
00:06:29.860
The fall economic statement that just came out compared to the budget from, I believe it
00:06:35.800
was April, you know, each year of projections, it adds billions more.
00:06:40.580
In new spending, we're about to hit that level of spending on debt that I didn't think we
00:06:48.520
would ever do again, and that is that we're going to be spending more on servicing the
00:06:52.840
debt than what the federal government spends to pay for health care in the provinces.
00:06:59.640
I mean, I've been watching that for a while, and I thought in a couple of years, we'll hit
00:07:04.600
I didn't think that would be this coming fiscal year.
00:07:11.780
They borrowed and they said they couldn't afford not to borrow.
00:07:15.320
Now, interest rates are back to levels that are much more consistent with the longer term,
00:07:22.840
and we've got this added problem that all that spending added to inflationary pressure,
00:07:30.380
It's true in the United States and elsewhere as well.
00:07:33.640
A lot of governments kind of overdid it at the same time, but now central banks have put
00:07:38.980
the brakes on, and so the cost of servicing the debt is up.
00:07:43.740
Since you mentioned the cost of debt service, I want to point out that there's a lot happening
00:07:49.520
in federal finances now that is different from what happened when the federal government
00:07:55.940
got into big debt and deficit troubles back in the 80s and 90s, and one of the things
00:08:01.880
that really concerns me when I look at these numbers is not just what they're showing on
00:08:07.120
those debt servicing costs, which, as you point out, are now much higher than we thought they
00:08:11.880
would be, certainly much higher than the government projected they would be, but there's a whole
00:08:15.720
other side to the federal government's balance sheet.
00:08:18.420
The federal government has a lot of financial assets as well.
00:08:21.380
They have all these crown corporations, and investment income from those crown corporations
00:08:26.360
is historically a very important source of revenue for them, so the total cost of servicing,
00:08:31.740
you know, there's two sides to the balance sheet.
00:08:34.040
There's two sides when it comes to the interest you pay and the interest that you receive,
00:08:37.720
and that whole interest-receiving side is in trouble now in a way that we never looked at
00:08:53.840
The Bank of Canada bought a whole truckload of federal debt during the pandemic, and the
00:09:02.120
bonds that it bought, that was when interest rates were very low.
00:09:04.960
Now interest rates have gone up a lot, and so the bonds that they bought have lost a lot
00:09:10.180
Historically, the Bank of Canada paid a dividend to the federal government, but the Bank of
00:09:14.720
Canada is now in this situation where they've lost so much money that they're not going to
00:09:19.640
So that's one example where you had this investment income coming in on the revenue side of the
00:09:24.160
balance, or the revenue side of the federal government's statement of operations, to use
00:09:29.000
the formal term, what you see when you look at the budget, what you see at the end of the
00:09:34.020
Now there's a whole lot more money going out to these various crown corporations, and the
00:09:40.440
federal government is projecting that they're going to be seeing a healthy flow of investment
00:09:46.220
So in ordinary times, and back in the day when the federal government was in trouble before,
00:09:51.160
that was an important offset to the interest payments that they were making.
00:09:55.680
But I'm worried that in addition to the higher interest payments that you just mentioned,
00:10:00.040
we're also going to be seeing that there's a hole on the investment income side.
00:10:03.580
And so what that means is effectively that the cost of servicing the debt has gone up by more
00:10:07.920
than what you see when you look at the interest payments alone.
00:10:10.720
So I'm taking nothing away from your observation that the interest payments are higher.
00:10:17.880
That's, in many people's eyes, kind of a bad indicator when you're spending more than 10%
00:10:26.520
But we also now have to pay attention to the other side.
00:10:30.060
of the balance sheet, all their financial assets and the revenue that may or may not
00:10:36.100
So I just wanted to put that flag up for the numbers, people in the audience, that it has
00:10:43.880
And I think that we're going to be needing to pay more attention to some of those numbers
00:10:49.860
When governments get into fiscal trouble, things, you know, sometimes the numbers that
00:10:54.800
you're used to watching stop telling you the whole story.
00:11:02.900
And then, you know, this growth in debt, you know, you look, we can cut the government some
00:11:08.240
slack and say, look, they had to take on some debt during COVID.
00:11:11.960
But they took on an extraordinary amount of debt.
00:11:15.480
And we have known for some time that much of the spending that they undertook during COVID
00:11:22.780
It was not related to supports for individuals, supports for businesses.
00:11:26.660
It was not related to buying, distributing the vaccines or other measures.
00:11:35.540
They decided that this was what needed to be done.
00:11:39.560
And now we're paying for it with higher interest payments.
00:11:42.660
But as far as the bonds go, here's what I don't get.
00:11:46.940
But when I looked at the Ontario fall economic statement, yes, their interest payments are
00:11:53.320
going up as well, but they're going up to about from 6% to 7% of revenue.
00:12:00.760
The federal government used to be down around 6% of revenue going to interest payments on
00:12:10.120
And when I asked the folks at Ontario, I said, why the difference?
00:12:14.480
And they said, all during COVID, they just kept refinancing their debt.
00:12:19.840
When interest rates were at historic lows, they would refinance with 30-year bonds at 1%,
00:12:24.760
It appears that the federal government didn't do that.
00:12:28.720
And now the interest rate increases are going to be hitting the federal government's bottom
00:12:39.520
We can sound like two pointy heads talking about this, but this has a real world impact
00:12:45.280
when you're no longer able to afford the services that people expect.
00:12:49.620
Well, there's another very straightforward reason why the federal government's interest
00:12:54.240
payments have gone up so much more than Ontario's or other provinces.
00:12:57.920
And that is just the scale of the borrowing they undertook was so huge.
00:13:02.740
And it was huge relative to the federal budget.
00:13:07.960
They didn't quite get there, but they came close to financing half their spending with
00:13:12.600
So if you're running up debt at a rate like that, yeah, your interest payments are going
00:13:19.260
You didn't intend to lead me back to what I was saying earlier about the investment income
00:13:28.400
But I will go back there because the federal government sold all these bonds to the Bank
00:13:37.480
And so if you just focus only on their selling bonds at a time when yields are really low,
00:13:44.840
so this is a good time to be borrowing, then it looks like they were doing something similar
00:13:49.700
to what the province of Ontario was doing with refinancing.
00:13:53.400
But the kicker is they sold all those bonds to the Bank of Canada and they own the Bank
00:13:58.160
So they were selling those bonds to themselves.
00:14:00.420
How does the Bank of Canada finance itself with short term?
00:14:03.340
You know, all of the Bank of Canada's liabilities that, you know, when they're pushing money
00:14:10.460
out into the financial system, a lot of this stuff, these are short term liabilities.
00:14:15.940
So even though the federal government itself looked like it was financing in a prudent way
00:14:20.960
and the finance minister was saying we can't, you know, not afford to borrow these interest
00:14:24.440
rates, they were selling the bonds to themselves.
00:14:29.760
Is it a problem that the Bank of Canada was buying federal government bonds?
00:14:35.880
I think you'd put this into the same category of what you had said earlier about the need
00:14:44.060
And I would not have been at all critical of the government for going into deficit.
00:14:49.620
I mean, they should have been in surplus before the pandemic because the economy was
00:14:52.740
strong and there was no reason to be running a deficit, but it was kind of like a signature
00:14:58.480
Once the pandemic hit, yeah, for sure, you do not want when the bottom is falling out
00:15:06.440
I mean, how long are we going to be locked down for?
00:15:10.720
You don't want to be suddenly raising taxes and cutting programs.
00:15:18.740
And when you go over to the monetary and financial side, the payment system was in danger of seizing
00:15:25.040
up suddenly there was, you know, people wanted cash, people wanted liquidity.
00:15:29.720
And so here in Canada, as elsewhere in the world, central banks were pumping all this
00:15:37.360
And a very obvious place to sell the debt to is the central bank, because the central bank,
00:15:43.740
They have two sides of their balance sheet as well.
00:15:45.920
If they're going to be emitting a whole lot of money, they got to hold some assets that
00:15:53.960
But just as you said about the spending itself, it went on for too long.
00:15:57.760
We got the high inflation that we did because they just kept their foot to the floor too
00:16:03.380
The central banks, you know, here, the Bank of Canada, the Fed, other central banks, this
00:16:07.960
was a mistake that got made in many places, not just here, but they kept it up for too
00:16:13.460
They printed too much money in return for all these bonds that they absorbed.
00:16:21.160
What bothers me now, just to sort of update to where we are now and look ahead.
00:16:25.340
So we know, because we have high inflation, that we push the economy as hard and then maybe
00:16:41.100
What I would really like to see from the federal government, and we just didn't see any discussion
00:16:46.180
of this in the fall statement, and I don't know if we'll see any in the spring budget.
00:16:50.440
I sure hope so, but on past performance, probably not.
00:16:55.340
They ought to be easing back on the accelerator.
00:16:57.640
They ought not to be continuing to spend all this money.
00:17:01.840
And if they did that, then the Bank of Canada's job would be a lot easier.
00:17:10.020
That's something that Scotiabank, among others, Scotiabank was back in the news.
00:17:14.640
But I've been citing Scotiabank reports for two years now that said if the federal government
00:17:23.480
doesn't control its spending, then it will be left up to the Bank of Canada to do what
00:17:31.600
And that will mean higher interest rates, which means higher mortgage payments for households,
00:17:37.100
higher line of credits for households and businesses, that the pain will be felt where it shouldn't
00:17:50.340
You know, I ran the numbers on the final budget of the Harper government, 2014-2015.
00:17:59.080
Let me just pull up so I've got exact numbers here.
00:18:01.940
But this is this is from the the 2016 federal budget.
00:18:06.580
So this is once the Trudeau liberals are in and they on the summary statement of transactions
00:18:11.480
say that that they spent we had a one point nine billion dollar surplus that year, by the
00:18:19.520
But budgetary spending was at two hundred and eighty million dollars in that year.
00:18:25.900
You look at the fall economic statement and we're at four hundred and fifty six billion,
00:18:32.780
four hundred and eighty eight billion, sorry, in spending this year, five hundred and nineteen
00:18:37.280
billion in spending for the coming fiscal year.
00:18:40.140
That's an increase of more than 60 percent in government spending at a time when the Bank
00:18:46.000
of Canada says inflation's been twenty five percent.
00:18:49.820
So we're running at more than double the inflation rate in terms of government spending.
00:18:53.500
And I'd be hard pressed to find anyone that says, yes, government services are 60 percent
00:18:59.780
better than they were when this government came in.
00:19:03.020
I honestly don't know what we're spending the money on beyond the debt servicing costs have
00:19:11.080
Well, a huge part of the increase in federal spending has simply been the federal government's
00:19:18.820
They've been giving wage increases to their employees and they're also running up pension
00:19:28.260
I mean, one of the difficult things about federal government spending on their own operations
00:19:37.180
You know, you hire somebody now and then they start to accrue pension benefits.
00:19:42.440
And so there's this big, long liability that's going to be payable, you know, long after the
00:19:51.040
So there's a big problem with the type of spending they've been undertaking.
00:19:54.740
If they had been improving the quality of the services that they are providing, if passports
00:20:00.920
were getting issued, if they were handling immigration properly, if our taxes were getting done in a more
00:20:06.240
expeditious way, then yes, there'd be something positive to say about all this.
00:20:11.600
But these this massive increase in personnel has not has not had commensurate benefits.
00:20:18.680
They have a big productivity problem in the federal government and it seems to be getting worse.
00:20:23.080
I do want to come back to what you had said about the Bank of Canada, because it's absolutely true that the
00:20:27.820
bank is having to apply the brakes more than they would need to because the government's got its foot on the
00:20:33.360
accelerator. And if you think of that straightforwardly as a metaphor for what's
00:20:37.360
happening in a car, if you've got one foot on the accelerator and one foot on the brake, your car is
00:20:41.420
in trouble. But the other the the other way of of expressing what you were just talking about is to say
00:20:49.220
if the economy is running at capacity and if the federal government is increasing its
00:20:55.340
spending at a rate that's faster than the economy's productive capacity is growing, then the federal
00:21:02.300
government is crowding other stuff out. And you think about, OK, so if the federal government's
00:21:08.720
getting bigger, what's going to get smaller? How about we're going to spend less on residential
00:21:14.340
construction on housing? Well, that doesn't seem like a very good idea because we have a colossal
00:21:19.580
housing shortage. The federal government, of course, is making it worse with their immigration
00:21:23.480
policies. But we don't want to see the amount of our economy that's getting devoted to building new
00:21:29.180
housing get any smaller. How about business investment? Well, business investment has been
00:21:34.420
terrible over the last little while. The amount of capital per worker is actually falling. And
00:21:40.180
that's that's something that hasn't happened since the 1930s in the Second World War. That's a very
00:21:45.780
weird and ominous thing. It sure isn't happening in the United States. It isn't happening elsewhere in
00:21:49.960
the OECD. So we don't want lower business investment. We want higher business investment.
00:21:53.940
So, you know, what else what's going to give? Well, the consumer is going to have to cut back.
00:21:59.660
People are going to actually have to, you know, have less goods and services for households. And
00:22:05.140
who wants that? Our living standards have been stagnant for quite a while. So it's not simply that
00:22:10.560
they're, you know, creating this problem in the here and now for the Bank of Canada. They're squeezing
00:22:16.000
the productive capacity, the economy by expanding. And I suppose just, you know, while I'm listing all the
00:22:22.280
things that we don't want to see crushed by the federal government getting bigger and bigger,
00:22:26.880
we got provincial governments as well. We were talking a bit about this earlier.
00:22:30.760
They're the ones that have the heavy lifting to do on health care. They're the ones that are
00:22:34.660
on the front line when it comes to all kinds of services that matter to us in our daily lives,
00:22:39.380
including the stuff that we get through our municipalities. So we don't want to see that
00:22:43.080
getting squeezed earlier. So I really think that we've got a big problem here and that the federal
00:22:47.440
government is growing without giving us commensurate value for the increase in its overall fiscal
00:22:53.680
footprint. And that of necessity means that other parts of the economy have to get smaller. And I don't
00:22:59.480
see any part of the economy that I want to get smaller so that the federal government can get bigger.
00:23:04.820
No, no, that that is not something we want. Bill, we've got to take a quick break. But when we come
00:23:10.060
back, you mentioned something about the federal government's immigration policy, making the housing
00:23:15.440
situation worse. There's a stat that that I just saw for the first time today. I'll tell you about
00:23:20.640
that when we come back, because it is quite shocking and telling in terms of the left hand not knowing
00:23:28.200
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fabulous for less. So Bill, just before we went to the break, you were discussing several things going
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on with the federal government and housing, you know, residential construction not being where it
00:25:13.100
should be, that being squeezed out by federal government spending. And you mentioned the
00:25:17.100
immigration policy. And this week, Stats Canada, or this past week, Stats Canada, it's in the last
00:25:24.980
little bit. They said that we went over 40.5 million people in the country. Our population
00:25:32.400
is more than 40.5 million. Now, what's shocking about that is, according to Stats Canada, we just
00:25:38.960
crested over 40 million people in June. So between June 15th, when they announced we hit 40 million
00:25:45.820
people, and the end of November, we've added half a million people. But we're not adding half a million
00:25:53.440
homes. And, you know, while the federal government has their own financial problems, the rest of us
00:25:58.680
have financial problems because of the inability to, for people to be able to buy homes, to find
00:26:06.100
affordable places to live. The Consumer Price Index said, in some parts of the country, rent increases are
00:26:19.720
I'm very dismayed to see what's happening on the immigration front, because
00:26:24.880
we've historically had a very successful approach to immigration in Canada.
00:26:33.380
People elsewhere in the world who look at Canada have regularly expressed amazement that we could have
00:26:40.780
the high rates of immigration that we have had, and have the economic success that immigrants have
00:26:46.900
had, and the people who are here already, at the same time. And, and, and broad based support for
00:26:55.020
the exactly, yes, that is that is just where I was about to go, because they all go together.
00:27:00.220
It's been a successful system. And now, the federal government has really raised very significantly the
00:27:10.540
targets for permanent arrivals. So, up to 500,000. So that's a, that's a big number 500,000 annually.
00:27:19.580
And then on top of that, we have a huge inflow of temporary workers and students. And we're not even
00:27:26.900
sure about the numbers there. One of the stranger things that's happened lately, and it complicates
00:27:32.120
the Bank of Canada's job, among other things, is, is even under even measuring the labor force
00:27:38.020
accurately, and being confident that we know how many people are working in the economy, because
00:27:42.360
the rate of increase is so great, as you've just been saying. And so, if you, if you look at the
00:27:51.080
sort of, you know, 1 million increase in temporary people of, of temporary residents of one kind or
00:27:58.180
another over the course of a calendar year, and then what you were just talking about, with respect
00:28:02.680
to the increase in permanent arrivals, it's, it's a very large number. And I, so I think it's about when
00:28:10.520
you add up the 900,000 that the federal government has talked about for international students,
00:28:17.520
about 450,000 to 480,000 for permanent residents, and then about another 250,000 in temporary workers,
00:28:27.480
everything from a professor to an NHL coach to the farm workers, that's 250,000. You're, you're at 1.6
00:28:33.520
million annually. And the growth rate, last time I looked, the, the numbers that you were referring
00:28:39.840
to might be an update on that, but our population was growing at a bit more than 3% year over year,
00:28:46.980
and almost none of that is, is, is births minus deaths. It's essentially all net immigration.
00:28:53.740
So 3% increase would mean in very, you know, broad strokes, you, you, you have to be adding to
00:29:02.640
the number of dwellings in the country at about the same rate. If you just want to keep pace with where
00:29:10.400
we are, and I think most people would say that where we are right now, isn't really all that good.
00:29:14.380
The fall economic statement did say quite a bit about housing, but when you talk up the total
00:29:21.020
number of new spaces that they're talking about, and you think about how many years it's going to be
00:29:26.560
until those are actually places people can live in, you know, presuming that we do eventually get to
00:29:33.140
those numbers, it's just nothing close to what we would need to accommodate the influx of population.
00:29:40.880
And I don't mean to, you know, it's, it's, it's a, it's a weird thing to be talking this way,
00:29:45.240
because I've always thought that our immigration system was a good one, and that we were a real
00:29:51.600
success story. And now it sounds like I'm, I'm, I'm talking against immigration, but I, you know,
00:29:57.260
you look at the housing situation, and you say this just, it's not working out what they're doing
00:30:02.020
on the fiscal side isn't just any, it is nowhere close to what we would need just thinking about
00:30:06.300
housing alone. And then you're, you're seeing the stories of Ukrainian refugees, leaving the country
00:30:12.240
of people who immigrated here, leaving the country saying it's too expensive. I can't live here
00:30:17.500
anymore. When my parents came to this country in 68, they bought a house within five years. You know,
00:30:24.760
you talk to new immigrants now, and they're, and unless they're coming with money, they say,
00:30:29.040
that's just not feasible. You know, they either have to come with money, or there has to be a huge
00:30:35.880
family effort with an extended family buying house. We, we are not setting anybody up for success with
00:30:43.460
the way things are now. No, we're not. And I mentioned earlier, the problem with other types
00:30:49.680
of investments. So not if you if you look at away from the residential side, you look at non residential
00:30:56.080
investment. So all of the machinery and equipment and software and all the infrastructure that
00:31:02.960
businesses put in place, in order to allow workers, you know, give workers the tools they need to earn
00:31:09.640
good wages and, and, and compete internationally. The problem is, there's also a problem on that side,
00:31:17.700
we just do not have enough investment happening in the economy. So that all this growing population
00:31:24.320
can earn higher wages, be more productive and earn higher living standards.
00:31:30.860
I don't think a lot of people would understand the relationship between a business investing in a
00:31:35.720
piece of machinery or some software, and them getting a higher paycheck. Well, does that work?
00:31:42.880
Labor, labor productivity is not a term that everybody makes everybody's heart beat faster. But,
00:31:48.740
you know, it's at the core of what allows us to live better than our grandparents did. We all have
00:31:57.460
better tools to work with. You know, once upon a time, a construction site, you had a bunch of guys
00:32:02.640
with shovels and wheelbarrows. Now you have excavators. Once upon a time, people were using,
00:32:07.800
you know, manual adding machines. Now we have computers that do all that work for us.
00:32:11.720
The list is very long. If you just look around a modern workplace, and you say how much of what
00:32:17.740
people are working with here nowadays was there 10 years ago or 20 years ago, that constant process
00:32:25.000
of retooling is what enables us to earn higher wages, compete, and live better. And what's very
00:32:32.660
much concerning me right now is that after the middle of the last decade, initially, the SAG and
00:32:39.760
business investment in Canada, you could chalk it up to the fact that oil prices collapsed.
00:32:44.960
Natural resource industries are very capital intensive. And so there was naturally a bit
00:32:49.940
of a fall off of business investment reflecting that. That's all in the past. Now, you look at
00:32:54.720
energy related investment in the United States, it's way up in Canada, it's just struggling along.
00:32:59.800
You look at investments in machinery and equipment. In the United States, it's up so much that by now,
00:33:05.260
the average worker in the US is getting almost double every year, the new investment in machinery
00:33:10.360
and equipment that the average Canadian worker is getting for software.
00:33:14.800
And so our wages in this country, compared to the US, have stagnated for a long time,
00:33:22.060
they're increasing. I'm sorry to put you on the spot, off the top of your head, do you know roughly
00:33:28.100
what the disparity is between what the average worker makes in Canada versus the US?
00:33:32.980
I don't have that in front of me right now. But the gap is widening. We've always had a gap.
00:33:38.480
But it is widening. And I think very largely attributable to what I've just been talking about,
00:33:44.860
that there's been less investment. If you don't mind me just going back to the numbers,
00:33:50.140
for the sort of intangible stuff, which is so important nowadays, software databases,
00:33:55.640
all of the intellectual property products that are so much part and parcel of the new economy,
00:34:02.480
in the United States, they're investing four times per worker what we are. So this is not a good
00:34:09.560
situation for us to be in. And the gap between output per worker in the United States and Canada
00:34:15.580
is growing. The gap between output per worker in Canada and other OECD countries is growing as well.
00:34:22.800
There is something uniquely problematic in Canada. So it's a big conversation, all of the different
00:34:29.380
reasons why that might be happening. But one of the things that you don't want to be doing when
00:34:34.720
you've got that kind of slow burn investment crisis is bring in a whole lot more people.
00:34:40.780
Because pretty soon, our construction sites are going to have guys with shovels and wheelbarrows,
00:34:45.700
because it's all you know, we're adding all this labor, but we don't we're not giving them the
00:34:49.920
equipment that they need to do their jobs. We do not want to be turning ourselves into a economy,
00:34:55.040
you know, where people are making t shirts on sewing machines. We want to be the country that's making
00:35:00.580
the machines that are making the t shirts, or maybe the country that's making the software that,
00:35:04.640
you know, that controls those machines. Canada is going down a very strange path right now.
00:35:10.580
And it disappoints me to say it. But if it were up to me, I would slow the immigration down until
00:35:16.560
we fix this investment problem. You know, for people that think, well, we've always been a,
00:35:22.880
you know, a highly functioning economy, a wealthy economy, that's not going to change.
00:35:28.460
You know, I would just point out that Venezuela and Argentina used to be economies that rivaled Canada
00:35:33.660
in terms of, you know, average wages, in terms of GDP per capita, things like that. They used to be,
00:35:41.880
you know, going back to the 1960s, perhaps, but they used to be strong economies, and they have,
00:35:49.460
due to bad economic decisions, mostly at the government level, they've turned into basket
00:35:53.900
cases. The current line, and of course, there's politics involved in all of this, not just numbers,
00:36:02.040
Bill. The current government is not doing well when you look at the polling. And, you know,
00:36:08.500
as much as every politician I've ever covered will tell you, polls don't count except on election
00:36:14.260
day. They all read them, and they all adjust their policies based on that, or their messaging.
00:36:20.340
And so with the conservatives up and the liberals down, one of the messages from the liberals is that
00:36:25.480
you can't vote for the other guys, because they're going to bring in austerity. And they try and scare
00:36:32.200
people and say, well, you know, the other guys want to cap spending. Well, that means you're not going
00:36:37.580
to get your national daycare program or your dental program. I added up the spending at National
00:36:45.160
Defense, the national childcare program, the pharmacare program, and I was just over half of
00:36:51.640
what we're going to be spending on that interest debt payment we were discussing earlier. These are
00:36:56.700
small programs in the grand scale of things. Can we have a slowing down or a paring back of
00:37:05.040
government spending without it being, quote unquote, austerity and taking away services that
00:37:12.520
Canadians want? Or do we have to get to the point where we were in 94 and 95 when Jean Chrétien and
00:37:20.020
Paul Martin gutted government spending because they had no other choice?
00:37:25.560
Well, we don't want to have to go through something like what Jean Chrétien and Paul Martin went through.
00:37:31.120
But since you started on the political angle, I will say that they were politically quite
00:37:36.500
successful. It's clear, it feels so intuitive that if you spend a whole lot more money and
00:37:47.280
finance it by borrowing so that nobody has to pay the taxes, that it just feels like that's
00:37:53.180
a recipe for political success. But in fact, I think over time, the historical record doesn't
00:37:59.120
really bear that out. It's not necessarily true that fiscally irresponsible governments
00:38:05.000
reap the benefits of the polls, maybe in the very, very, very short run, but these things catch up
00:38:10.260
to you fast. And there are plenty of examples of governments that did take a more austere approach,
00:38:16.720
if you like that term, and were politically successful. So I think that what sort of seems
00:38:22.440
obvious or intuitive isn't necessarily true. And I don't think that a government that's,
00:38:28.280
you know, committed to a more responsible fiscal program should be quite as concerned as we often
00:38:36.240
feel they should be that it's going to be politically hard to sell. On to the sort of meat of the question,
00:38:42.320
can you cut without it hurting? Well, everybody benefits from spending of one kind or another.
00:38:47.980
But we talked already about the degree to which the federal government has grown itself just with
00:38:54.760
its own internal operating costs. The spending on consultants gets headlines, and it has ballooned
00:39:02.920
like crazy. But when I'm just a couple of blocks from the beautiful McKinsey headquarters here in
00:39:08.400
Toronto, they've got a fireplace going and they've got a lovely cereal dispenser for all the workers that
00:39:14.900
spend 24 hours a day there. It's beautiful. Well, McKinsey is a very high profile name. They are
00:39:19.860
far from the only one that has been benefiting. There's lots of them from this. Yeah. And one of
00:39:25.260
the reasons that, you know, you put an exclamation point on it is that if the federal government were
00:39:30.060
cutting back and cutting back in areas where it's hard to do things internally, like, you know, all of
00:39:36.400
us spend on outside people when we have to do IT stuff, that often doesn't work out all that happily,
00:39:42.460
but compared to if you tried to do it yourself. Yeah, there are certain types of things where you
00:39:45.980
bring in outside people, it just makes sense. But in the case of the federal government, they've been
00:39:50.120
expanding all over the place anyway. So there is this question.
00:39:53.560
So they're up by 30% or so on their workers. Yeah, but they're also up on their consultants.
00:39:58.920
So you could cut back and the average Canadian would not experience any pain as a result of that. But
00:40:06.840
the pressure of the federal government sort of squeezing the rest of the economy, that would be
00:40:11.380
alleviated. And so there would be some benefit from that. But let me not dodge the harder parts of your
00:40:18.700
question entirely, because there are some places that we really do need to see the government
00:40:24.940
exercise some restraint in complete contrast to what they've been doing, where there would be some
00:40:30.580
political pain. And I'll mention the Harper government's plan, and it would be kicking in
00:40:36.560
about now to gradually raise the rate, the age at which people normally receive OAS payments,
00:40:42.760
old age security payments. That was a, you know, reversing that not proceeding with that was a big plank
00:40:48.620
in the liberal platform back in 2015, which then Finance Minister Bill Morneau, who knows the thing
00:40:54.540
about her tubo pensions, fought, but then caved on, which is a great shame that he did. At some point,
00:41:02.240
with Canadians continuing to live longer, and healthier lives, so that a lot of people can
00:41:07.280
afford to work longer, they've got to revisit that. It doesn't mean that...
00:41:11.920
Or let me throw this out to you, because I argued with the Harper guys, when they brought this in,
00:41:17.160
and I said, why are you raising the age? Why don't you lower the rate at what you claw back?
00:41:22.800
So in 2013 or 14, when they brought that policy in, or proposed it, they were sending
00:41:30.680
OAS payments to seniors who made $112,000 a year in retirement. And I said, there's no way that the
00:41:41.980
government of Canada should be giving you a penny if you're making $112,000 a year in retirement.
00:41:47.780
They said, well, we can't cut back there, so we have to raise the age. And I think that would be
00:41:53.500
an easier sell. Now, are you going to get as much bang for your buck? Perhaps not. But
00:41:57.340
if old age security is supposed to be there to lift people out of poverty, which was the
00:42:02.840
original intent, even making $80,000 a year in retirement, are you in poverty? Do you need
00:42:09.480
an extra paycheck from the government? I think there's an argument there.
00:42:12.680
Well, another way of thinking about what you've just said would be we've got the guaranteed income
00:42:17.900
supplement. So that is the real safety net program to take care of destitution in old age. So you would
00:42:25.660
treat that differently from how you would treat the rest of the program. If somebody who is in bad
00:42:32.160
financial shape and also just can't work anymore at age 60 that needs an income, then you've got the
00:42:39.700
guaranteed income supplement to do that. So you can change these programs in ways that reduce some
00:42:46.860
of those perverse kind of redistributive things. There's another important thing that you can do
00:42:52.660
as well, and that is we've now got, as with the Canada Pension Plan, a provision that you can take
00:42:58.320
a different amount of OAS depending on whether you defer a receipt or not. So there are various ways of
00:43:05.560
handling this type of thing. So it's not, you know, a kind of cliff edge thing where somebody who
00:43:10.840
really needs the money suddenly isn't going to be getting it. But those are areas where...
00:43:16.360
But it's reform. You're basically saying there needs to be some kind of reform.
00:43:21.160
We can't, yeah, we have to be realistic about demographics. And that's an area where, yeah,
00:43:28.340
there would be some political pushback. But the other thing I'm just going to jump right in,
00:43:34.060
since we're talking about pensions, I resisted talking about this earlier, but I have to talk
00:43:39.700
about the federal government's own pensions. They have extraordinarily rich pensions in the
00:43:45.980
federal public service. Members of parliament, federal judges, they accrue pension benefits at a
00:43:50.780
rate that is way beyond what would be legal for you or me or, you know, our...
00:43:56.920
Our fee saver. Yeah, there's these Income Tax Act limits on how much you can put aside and how
00:44:03.440
much benefit you can accrue in a pension. But the federal pension plans kind of get around those
00:44:09.440
limits. They have special provisions for getting around them. And they're not properly funded either.
00:44:14.780
One of the things in federal debt servicing costs, and again, for the numbers, people in the audience,
00:44:22.620
this might make your heart beat faster. Everybody else bear with me. The cost of those pensions,
00:44:30.880
that's a big part of the federal debt. And when we look at the interest payments on federal debt,
00:44:35.840
it's important to remember that they're not capturing some of those costs. What the federal
00:44:39.500
government did a few years ago is they moved some of those costs below the line. When you look at the
00:44:44.860
presentation in the fall economic statement and what they're showing us in budgets nowadays,
00:44:49.000
they've got this amortization of net actuarial losses below the line. Now, who reads an entry
00:44:58.360
like that? What on earth is an amortization of a net actuarial loss? Well, it is plain language that I
00:45:04.820
can manage. I'm going to say when they make these pension promises, they do not record the full cost
00:45:11.880
of them in their expenses. And so what you're seeing below the line there is a kind of liability that
00:45:18.340
was hidden from view and it's gradually coming into view. So in addition to restraining their
00:45:24.120
hiring and in addition to restraining the wage increases that they are giving, they ought to do
00:45:29.240
something about those pension plans. Nobody in the country has pension plans like federal employees
00:45:34.820
do. We used to have stuff like that in Ontario. They performed the teacher's plan. They performed the
00:45:42.660
municipal employees plan all across the country. Now you see these shared risk, shared governance
00:45:48.820
plans. It's a very much better way of running a pension plan. The federal government should go in
00:45:53.860
the same direction because a lot of the costs that we're seeing and some of them not displayed very
00:45:59.780
transparently are coming from those pension plans. So we should be looking at overall compensation for the
00:46:05.760
federal government, not just the wages and salaries they're paying in the here and now, but also the
00:46:09.640
pension promises they're making. Because for the average Canadian, that's a big cost and we're not
00:46:15.960
seeing a commensurate benefit for it. So if I'm advising the federal government about where, how to
00:46:20.800
get their costs under control, I'd be looking at that whole compensation package. Wow. I knew nothing
00:46:26.440
about that. I knew at one point the MP's pension plan, I think for every dollar they put in, we put in
00:46:33.360
four or five and Stephen Harper changed that, but much with much grumbling from his own MPs so that
00:46:39.720
it's a 50-50 split. And I thought, well, that's fair, but I didn't know about the rest of it. So
00:46:43.560
that's eye-opening. No, even that plan, it's not funded. You'd think that a basic discipline of any
00:46:51.260
pension plan, and it doesn't matter whether you're private sector or government, whatever you are,
00:46:55.500
is you promise somebody a dollar in the future, you better put aside the money that's going to yield
00:47:00.820
that dollar so that when the time comes, you're going to be able to pay that obligation and not
00:47:06.280
say to the taxpayer, oh, sorry, we forgot to fund this. You're going to have to cover it.
00:47:10.680
The MP's pension plan is not funded. They did start funding some of the rest of their pensions,
00:47:15.660
but this whole area needs a lot of attention. And it was important what they did there,
00:47:21.800
and there was indeed a lot of grumbling. But MPs are in no position to lead on pension reform when
00:47:27.900
their own plan is unfunded. I'll ask you this to close, Bill. I think the federal finances are a
00:47:36.000
mess. We've both discussed this in various ways, but are we at that 94-95 cliff yet, where the Wall
00:47:43.180
Street Journal has to declare us an economic banana republic before things change? Are we at that point?
00:47:49.400
Are we headed to that point? Well, we're certainly not going in the right direction.
00:47:53.300
One of the things that I always get concerned about when I hear people talking about our good
00:48:00.400
credit rating is that the credit rating agencies have a very particular question in mind when
00:48:06.300
they're looking at any borrower, and that is, is the debt going to get serviced? And if the debt's
00:48:11.580
going to get serviced, then they say, good, everything's fine. Well, from a bondholder perspective,
00:48:18.540
sure, that's what matters. From a taxpayer perspective, that's not what matters. If you're
00:48:23.960
getting squeezed harder every year to cover interest payments, then the credit rating agency is happy
00:48:31.380
because the debt is getting serviced, but you're not happy because you're paying more and more of
00:48:35.560
your income just to cover the debt servicing costs. So I take some comfort from the fact that we're not
00:48:41.140
going to have a sudden stop, like that people are going to suddenly not be willing to lend us money
00:48:45.640
anymore. But I don't take any comfort from the point of view of Canadians who are paying higher
00:48:50.220
taxes not to get any higher services. One of the things I keep an eye on is this, how much tax money
00:48:57.220
are you paying every year compared to the dollar of government services that you're getting back?
00:49:03.500
So take out all the debt servicing costs, take out the interest income, and just look at the taxes
00:49:07.980
that we're paying and the services that we're getting back. During the pandemic year, hey, it felt great.
00:49:13.320
As I said earlier, the federal government was financing almost half its programs by borrowing.
00:49:18.320
So right in the here and now, it felt like we were getting all this free money. Already that balance
00:49:23.280
has switched back. Already now we are paying about a dollar in tax for every dollar in programs that
00:49:29.680
we're getting. And as the debt and the interest payments mount, that dollar that we're paying in
00:49:35.740
tax is going to be getting less than a dollar in programs. That's what started to happen to us in the
00:49:40.660
eighties and in the nineties. And that was one of the reasons why the fiscal situation got to the
00:49:46.240
point where the government felt they had to do something about it because people were paying
00:49:49.280
more and more, but they weren't seeing what they were getting back for it. So yeah, we're not about
00:49:54.180
to lose. We're not about to run out of borrowing room internationally, but we are certainly getting
00:49:59.300
less for our tax dollars than we were. And until that turns around, I think people are going to be
00:50:07.620
A full comment is a post-media podcast. My name is Brian Lilly, your host. This episode was produced
00:50:12.640
by Andre Pru with theme music by Bryce Hall. Kevin Libin is the executive producer. Remember,
00:50:18.120
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00:50:23.480
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00:50:29.320
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