For all its faults, the federal government isn’t that bad at managing the economy

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John Rapley is a political economist at the University of Cambridge and the managing director of Seaford Macro.

One thing lacking in recent commentary on the federal government’s performance is context. For all its failures – its inability to control debt, the deficit or immigration numbers, get a handle on the housing crisis or revive the sputtering economy – what’s overlooked is that in almost all these respects, Canada is doing little differently from its peers.

Only the housing crisis has been uniquely bad, but even then Canada surpasses other developed countries only in the scale of its problem, with inflated property sectors having become common (particularly in the “Anglo-Saxon” countries). Moreover the problem is systemic – all levels of government have played a part in it, as have the central bank and a substantial portion of the public, namely the millions who have benefited from juiced real estate returns and don’t particularly want the good days to end.

But when it comes to its debt and deficit, Canada is actually doing better than many of its G7 partners. Meanwhile, all Western countries are struggling with slowing growth, flatlining or even falling GDP per capita and poor labour productivity. Of the world’s 10 worst-performing economies this year, six are in Europe. And if you think Canada has lost control of its immigration, have a look at Britain, where a government committed to keeping annual immigration numbers in the tens of thousands just reported a figure that is now creeping up toward a million.

Does this mean Canada’s weak performance isn’t a problem? Absolutely not – the country’s future is at stake. But it does mean that the performance of the federal government is hardly the issue; the solutions are more difficult than many critics intimate. That’s because Canada is wrestling with the same big challenge facing all Western countries: how to support an aging population amid slowing growth in the labour force.

Take the debt and deficit, for example. It’s been said that the U.S. government is an insurance company with an army – that when you add up the costs of Medicare, social security and the Pentagon, there’s not much left in the budget. Much the same is true of all Western governments. In Canada, if you rope off pensions, health care, provincial transfers, welfare, defence and debt servicing, more than two-thirds of the federal budget is gone. Unless we’re prepared to reopen any of those files, there’s not much spending left to trim. If you add in a determination to keep taxes low, you have a recipe for tough choices.

Bear in mind that as with all Western countries, Canada’s debt soared during the pandemic because the government kept the economy afloat amid the lockdowns. The alternative would have been to allow the pandemic to rage through the population, risking a major loss of life and possible collapse of the health care system. That would have violated the social contract that emerged over the past century, when the prosperity of Western countries allowed them to build the welfare states that have done so much to better lives.

But with that social contract now so costly, governments are forced to rein in spending elsewhere if they want to keep deficits from getting out of control. As a result, they tend to curtail the sort of public investment that once powered growth. That comes at a cost. Governments that have chosen to prioritize fiscal prudence, such as Germany and Britain, have also run down their infrastructure – though decaying infrastructure is a problem across the West. Indeed, when you estimate the net worth of public assets, most developed countries have run down their capital in the quest to keep taxes down and budgets balanced.

That’s not a great way to run an economy. Decaying infrastructure constrains the growth of labour productivity, compounding the poor performance of the economy. In Canada, it’s also fuelling the housing crisis. If the government had more leeway in its budget, it could easily ramp up its spending on housing, but its other commitments preclude that possibility.

So, amid falling growth in both productivity and the labour supply, governments are forced to import workers. A lot of them. That, in turn, poses challenges for Western governments in integrating and housing newcomers. No Western country is dealing with this particularly well, but Canada arguably does better than most. After all, the country hasn’t yet produced a significant extremist party that demonizes foreigners, a problem that is becoming all too common elsewhere.

We’re all trying to find the right balance between building for the future and holding onto the past – between investing in the infrastructure and innovation that will power future growth and preserving the social contract we agreed to in the past. That’s becoming harder to pull off – the U.S. is managing both, but it’s blowing its budget to do so. The rest of us would all benefit from an honest conversation about the trade-offs we face.

 

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