Jack M. Mintz: Our risk-loving politicians play with fiscal fire

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For over a decade now, interest rates have been so low they haven’t let investors keep up with inflation, never mind taxes on their investment income. Bank GICs and treasury bills that pay diddly-squat don’t cover future retirement expenses. So, what do people do? They invest in risky assets like real estate, equities, commodities and junk bonds to get a better return. Some, even late in their careers, load up with cheap debt to purchase housing and other risky assets. Markets eventually turn sour, as they did in 2008, 2011, 2015 and 2020, taking away investment gains. Once risk costs are included, investors earn the same return as they would putting their money into safe assets. That is lesson #1 from an introductory finance course.

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Unlike investors, who think about their heirs, our politicians often ignore risk, given their short election cycle. As Minister of Finance Chrystia Freeland wrote in the forward to the 2021 budget: “In today’s low interest rate environment, not only can we afford these investments in Canada’s future, it would be short-sighted of us not to make them.” So, Canada took on a $335-billion deficit this past year to pay for income transfers so generous that household income went up by ten per cent during the pandemic recession.

Such risky fiscal behaviour comes with an eventual cost: inflation, credit downgrades and higher taxes. So far, consumer prices have risen 3.6 per cent in the first seven months of 2021, already taxing away that much of the purchasing value of government handouts. Given our fiscal prudence since 1995, our credit rating is still solid — even though Fitch downgraded our debt from AAA to AA+ in June 2020. With the recovery from the pandemic a little wobbly, governments have generally avoided tax increases, at least so far.

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With governments spending so much, are we eroding the private sector’s ability to generate income and wealth?

One would hope the parties would be clear as to how they would support economic recovery without putting Canada into long-run financial jeopardy. To their credit, the Liberals have costed their platform. Even costed, however, much of the Liberal fiscal plan is built on a house of cards. It is very unlikely they would limit their Christmas-tree approach to policy to just $78 billion of new spending over the next five years. Outside of childcare, which was already booked in the 2021 budget, their platform includes no large spending programs, such as long-term care or pharmacare, which were promised in the last Throne Speech. Are they the Liberals’ secret agenda, to be revealed only after a majority has been reached?

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The Liberals plan raises about $25 billion in new revenues but even this is unlikely. It proposes a 15 per cent minimum personal tax of $1.7 billion on those with over $223,000 in income. However, as Allan Lanthier pointed out in this newspaper, Canada already has a minimum tax at a rate of 15 per cent. If the goal is to make sure high-income taxpayers pay at least that amount, that may mean the donation credit will be taxed back, as well as other credits currently not clawed back. That won’t be popular with many charities.

The Liberals also estimate that $2.5 billion spent on the Canada Revenue Agency will yield an additional $14.5 billion in taxes, closing the so-called “tax gap.” As pointed out in a recent C.D. Howe Institute paper by Pierre-Pascal Gendron and the late Richard Bird, tax gap revenue estimates are typically far too optimistic. Overall, half the new Liberal revenues are a pipe dream.

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So instead of $70-billion binge in planned deficits, the Liberals will likely add another $80 billion to Canada’s debt. Our federal-provincial gross debt, already more than our GDP, will spiral even higher once we add on age-related health, pension and long-term care costs, too. To fund all this spending, it seems inevitable that Canadians eventually will be hit with a major tax hike, though exactly what kind and how big the Liberals aren’t saying.

Both the NDP and Conservatives have their own spending giveaways, as well. All three platforms illustrate another dangerous risk that should get more attention. With governments spending so much, are we eroding the private sector’s ability to generate income and wealth?

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As I listen to voters being interviewed during this pandemic election, the low-cost debt environment is creating an expectation that only government spending is the solution to our ills. A good example is the high cost of housing, up 17 per cent nationally since last July. The parties propose subsidies to affordable housing, first-buyer tax incentives, a reduction in GST on new housing, taxes on house flipping and the prohibition of foreign ownership of Canadian residential real estate. None of these measures will make an iota of difference in reducing housing prices — and some may push them still higher.

Two well-known factors lead to high housing prices: municipal zoning laws that limit new construction and public policies that fan excessive demand. Restrictive zoning laws have kept housing prices high, especially in Vancouver and Toronto, making it difficult for millennials and immigrants to move to areas of high economic growth. In our low-interest environment, fiscal policies like mortgage and insurance cost relief stoke already heated demand and push up prices further.

Parties are out-competing themselves in massive giveaways in the belief that deficit spending has no economic cost. Many Canadians believed that in the late 1980s and early 1990s, too — until runaway inflation and slow growth led to the 1994 financial crisis and true fiscal austerity. Shame on the parties for ignoring that experience. Shame on us if we let them.