Addressing the long-term issue of rising public debt in a post-COVID world


The COVID pandemic has unleashed an unprecedented amount of government spending on emergency income support and other relief programs. It’s pointless to sum up how much money has been spent, because the total amount will continue to grow as we move through the COVID-19 crisis.

Governments didn’t really have a choice. In an economic crisis of this magnitude, the biggest mistake governments could make is to withhold spending—or worse—reduce spending. It was, in fact, government austerity that helped push the economy of the 1930s into a decade-long depression.

It’s important to remember that the spending we are seeing now is emergency relief, and not expected to recur year after year. This makes it more manageable than a structural deficit, where government spending on basic programs and infrastructure is routinely higher than revenues.

Still, it raises the question: how are we going to pay for all this? There are a few options.

1. Raise taxes

This is how governments managed to pay down debt incurred during the First and Second World Wars. Sales taxes, personal income taxes, corporate taxes—they all went up to help pay off debt. In a year or two when the COVID crisis is solidly behind us, we could see taxes rise to pay off the debt we’re incurring today (or at least reduce the amount of new debt we’re adding to it.)

Of course, higher taxes are unpopular, particularly with wealthy people who tend to pay disproportionately more. Not surprisingly, tax increases are favoured by those who earn lower incomes and pay less in tax.

But high taxes hurt the economy, don’t they? Well, it’s not quite that simple. Economists are mixed on this, and depending on one’s political ideologies, it’s possible to find legitimate academic studies to support almost any argument for, or against, raising taxes.

Some of the world’s most stable and innovative economies—the Nordic countries—are among the most highly taxed in the world. On the other hand, reducing taxes can stimulate an economy in the short term (as per Donald Trump). But the trade-off for this is rising income inequality, which can result in social and political instability.

2. Cut spending

This is the favoured option of market libertarians who view most government spending as wasteful to begin with. But it’s despised by those who value or rely on government services, especially health care and education, which combined account for nearly two-thirds of provincial government spending.

Reduce spending is the easy answer some voters give when asked how governments should balance the books. But when those cuts hit close to home—such as cutting hospital services or allowing 40 elementary students in a classroom—voters get testy. People tend to like the concept of spending cuts, but not actual cuts that leave them without snow removal, their aging parents without adequate long-term care, or their children with crushing post-secondary tuition. The belief that there is tremendous waste and “fat to be trimmed” in the public sector is a bit of a unicorn. What is waste to some is an essential service to another.

Many point out that, in the short run, cutting spending is also bad for the economy. Reduced spending means fewer jobs in the public sector, adding to unemployment and increasing competition for jobs in the private sector. It also reduces the capacity of the future economy, especially cuts to education and infrastructure.

3. Allow inflation to rise

Another way to reduce the overall debt burden is to let inflation rise above the Bank of Canada’s current target of about two per cent. Higher inflation leads to higher prices and wages, which means more tax revenue. It also reduces the real value of any debt taken on before  inflation—in other words, pay off today’s spending with devalued dollars in the future. The federal government would have to get the Bank of Canada to agree with this plan, but it could be done.

But for a generation of Canadians, the very word “inflation” is heresy. In the ‘70s and ‘80s, soaring consumer price inflation was Public Enemy #1 for economists and central banks. At the time, interest rates were pushed sky high as a way of slamming on the breaks of ever-spiralling prices. Anyone who held a home mortgage in the ‘80s remembers one-year interest rates of over 20 per cent. All the while, the economy had stalled in “stag-flation”—a toxic mix of a stagnant economy and high inflation.

Inflating our way out debt has benefits and drawbacks. Inflation favours borrowers—both governments and consumers—as it allows them to more easily reduce their debt. It punishes savers and investors, who watch helplessly as their wealth depreciates before their eyes.

At the moment, inflation in Canada is low and stable, which is the primary goal of the Bank of Canada. By allowing the inflation target to rise from around two per cent currently to perhaps a moderate four or five per cent, maybe we can reduce our debt burden gradually. And by doing so, we can still keep inflation from exploding out of control.

Inflating our way out of debt is an option, and it shouldn’t be dismissed too quickly. Yet it’s a bit like cheating. It’s like taking diet pills with harmful side effects rather than eating less (cutting spending) or exercising more (raising taxes).

Raising taxes, cutting spending, allowing inflation to rise—no option is appealing. But there is a fourth option.

4. Do nothing

Keeping with the weight loss metaphor, it’s possible to simply buy bigger clothes and ignore the weight gain. For a country’s economy, why not just accept that our governments have higher debt levels? Does it matter for the average Canadian that the federal debt-to-GDP level rises from 30 per cent to 40 per cent? Or higher? As long as we’re not close to defaulting on our debt obligations, why should we put ourselves through all the misery of higher taxes, reduced spending or rising inflation?

It’s a fair question, yet there is a price to pay for higher public debt. Interest must be paid on debt, and while interest rates are close to zero now, that may not be the case in the future. Every dollar paid towards servicing the debt is a dollar not available for hip replacements, road paving, school computers or other spending priorities.

It also reduces our options as a country in the future. Just like racking up a personal credit card reduces spending options for an individual, so too does higher public debt for governments. This was the problem that Canada and Alberta got into in the 1990s. Levels of public debt were so high relative to the size of our economy that it was reducing our options.

We’re seeing unprecedented levels of government spending in 2020 with more likely to come. For every emergency program that is announced, the response tends to be “we need much more than that.” Governments are dousing the flames of a burning building. While the hose is being sprayed, one doesn’t question the damage that the water is doing to the flooring or the furniture. Yet damage is being done, and that will need to be addressed.

Dealing with soaring debt won’t be easy for governments or citizens in the future. Raise taxes, cut spending, allow higher inflation—there are advantages to all of these, yet all will be met with howls of protest. Do nothing is the fourth option, one likely to face the least protest, yet one that comes with its own cost.

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​​It's summer, and Albertans are enjoying the bounty of fresh fruits and vegetables. But those berries, beets and bananas come at a price.

Year over year, fresh fruit prices are up modestly (+1.4 per cent), but fresh vegetables are up a whopping 7.7 per cent!

Some of the reason why fresh produce prices are up is due to higher transportation costs. Most of our fresh vegetables come from Mexico or California. Fuel costs are higher, and they're being passed on to consumers. The softer Canadian dollar is also a factor.

What can shoppers do?

1. Where possible, buy local. It might not be pineapple or papaya, but our farmers can grow a wide variety of fruits and veggies—and they don't need to be shipped thousands of miles.

2. Grow your own. Many of us already keep gardens, but there's a lot that even high-density urban dwellers can do. It takes a bit of work, but fresh patio tomatoes and strawberries are delicious.

3. Re-discover canning and preserves. There's a reason Albertans have managed to live here for generations—they made it through the winter by canning, freezing and keeping vegetables in cold storage.

We live in a world where strawberries, grapes and lettuce can arrive from anywhere in the world, even in the middle of January. But being price conscious in the grocery store means we take a second look at all of the incredible fruits and vegetables that can be grown right in our backyards.​

Todd talked about this recently as part of The Hoot, a regular radio segment on Calgary Today on Newstalk770 with Angela Kokott and on 630 CHED with J'lynNye and Andrew Grose.

​"We shape our buildings; thereafter, they shape us."  -Winston Churchill

Calgary has seen some substantial investment in new buildings lately, many of them public spaces (the National Music Centre, the new downtown library). But there's more to urban architecture than having fancy buildings. There's a strong economic imperative to it as well.

Urban aesthetics matter to the attractiveness of a city, and thus to attracting newcomers. Attracting and retaining people - especially the young, talented and educated people who can go anywhere-is crucial. (In the recent Amazon second headquarters contest, Amazon explicitly looked for cities that are interesting and appealing to young tech workers.)

The question usually boils down to finances—and in the case of public buildings/spaces, how many tax dollars should go to building amazing structures. It's a good debate to have, but the answer must never be "build the cheapest thing possible."

Buildings and public spaces are with us for a long time. Certainly adding millions to the price of a project is a choice we have to make prudently.  But because they are permanent decisions, the public buildings we choose to build should be inspiring and interesting. They should bring people together in community. Ugly, utilitarian structures may be cheaper to slap up, but they come with a higher economic cost in the long run.

Todd talked about this recently as part of The Hoot, a regular radio segment on Calgary Today on Newstalk770 with Angela Kokott and on 630 CHED with J'lynNye and Andrew Grose.

Three key things stand out when taking a “30,000 foot” perspective on Alberta’s labour force:

First is the importance of Alberta as an engine of job creation. The number of jobs in Alberta has–on average–grown by 2.5 per cent per year since 1976. The average for the rest of Canada is 1.5 per cent. That might not seem like a huge difference, but if the number of jobs in Alberta had grown at the same rate as in the rest of Canada, there would be 736,000 fewer jobs in the province today. That’s a lot of additional jobs for Albertans and for the thousands of people from other parts of Canada and the world who have come here to make a better life.

Second, from agriculture and tourism to our universities and entrepreneurs, there are lots of reasons why Alberta’s economy has grown (and will keep growing). But the reason we have been able to outperform the rest of the country on job growth is our oil and gas sector and the economic activity it supports. The walloping our labour market has taken because of the 2015-16 recession drives this point home. Oil prices plummeted and the number of jobs in the sectors that depend on the oil industry shrank.

Third, the recession was painful and we are still feeling it. At 6.6 per cent in March, we had the highest unemployment rate in the country outside of Atlantic Canada. That’s a lot better than the 9.0 per cent we reached in November 2016, but it’s still high by Alberta standards. Alberta also had the longest average length of unemployment in the country in 2017 at 23.1 weeks (up from 14.5 weeks in 2014) compared to 19.6 weeks nationally. What’s more, we are still 28,000 jobs short of where we were in June 2015 (the peak) and this doesn’t account for the fact that our working age population has grown by 3.0 per cent since then.

Why does this matter? As Albertans, we should be proud of the contribution we've made to Canada’s job growth over the last four decades. It is also worth reminding ourselves and our neighbours that when the oil and gas sector falters, our ability to create jobs also falters. Finally, while the recession is over (Alberta’s GDP grew by 4.9 per cent last year), it does not feel that way to everyone and we are not “back to normal” on the job front.

You can find more analysis of Alberta’s labour force in the latest edition of Perch and the accompanying extended report on atb.com/economics

This post is written by guest writer Rob Roach, ATB Financial's Director of Insight.

We know the recession cut deeply into vehicle sales in Alberta. After all, with nearly one in 10 people out of work, motorists were forced to curb spending. But that didn’t stop us from buying cars and trucks altogether--we just altered what KIND of vehicle we bought.

Sales of new vehicles plunged 18 per cent between 2014 and 2016. At the same time, sales of used vehicles rose by 10 per cent. And because the volume of used vehicle sales is almost double that of new, the effect was that TOTAL sales (i.e., new and used combined) barely fell at all.

This switch from new to used vehicles also happened in the recession of 2008-09. In fact, new vehicle purchases were hit even harder. After hitting a record high in 2007, new vehicle sales dropped 27 per cent by 2009, while used vehicles continued to rise. Sales of new vehicles didn’t fully recover for four more years.

The substitution from new to used cars and trucks is not surprising during an economic downturn (that fresh new car smell comes at a price). But as Alberta’s economy gradually claws its way back, new vehicle sales are rising once again, reaching 11 per cent in 2017.

There's always a lot of attention paid to wages and jobs in the oil and gas sector. But what about at the other end of the pay scale? How have Albertans earning low wages fared through the recession and now into the rebound?

Over the last five years, (Feb'13 to Feb'18) workers in the two lowest paying sectors—retail, and accommodation and food—have seen their average weekly earnings increase. But the two have moved in different ways.

Weekly earnings in retail are up 12.2 per cent from five years ago. That compares favourably against the provincial average of 5.6 per cent. However, workers in accommodation and food have barely seen an increase in weekly earnings at all--a small gain of 3.5 per cent. That hasn't even kept up with inflation.

At the same time, total hours are up 0.4 hours for retail workers, and down 1.8 for accommodation and food.

So what's the upshot to all of this?

Trends over the last five years—which involved a nasty recession and a jump in the minimum wage—seem to have been positive for retail workers. They are working a few more hours and earning higher weekly paycheques. But it has been negative for those in accommodation and food. They're working fewer hours on average, and their paycheques have barely risen.

If there's a positive note for accommodation and food workers, it is that there's little evidence to suggest jobs are being lost. Total employment is up 10.3 per cent for accommodation and food compared to five years ago.

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