Terence Corcoran: Election highway to economic slowdown

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If all goes according to the “fully costed” fiscal plan in the Trudeau Liberal party platform, the federal debt will hit at least $1.4 trillion in 2025/6, roughly $35,000 for every Canadian and about $140,000 for the proverbial family of four. In 2019, federal debt per capita stood at about $20,000 or $80,000 per family. How many Canadians will experience a 75 per cent increase in income over these years — or their lifetimes — to help pay for the debt?

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It’s not just a Liberal thing. As the federal election battle continues, Canadians face a political race between two leading parties dedicated to a massive expansion of government intervention and spending, the impact of which is highly likely to lead to slower growth and weak gains in personal and family income.

The spending plan of Erin O’Toole’s Conservatives isn’t a whole lot different from the Liberal plan. The NDP is in another galaxy, which means the economic impact would be even more disruptive, in terms of growth and the tax burden Canadians of all ages would have to bear in years to come.

Younger Canadians between the ages of 16 to 25 can expect to pick up the largest share of the tax burden, according to a new paper from Jake Fuss and Milagros Palacios at the Fraser Institute. By their modelling, the increase in total present-value new debt means Canadians between the ages of 16 and 80 will have to pay a total of $332 billion in personal income taxes over their lifetimes. Canadians between the ages of 16 and 25 will have to pay an additional $117 billion in taxes. “All individuals who are 25 or younger in 2025 will face lifetime tax burdens of at least $20,000 due to rising federal debt.” A 16-year-old in 2025 faces a startup tax burden equivalent to $29,663 just to cover the new COVID election debt.

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Where will these young people, and the rest of Canadians, get the income needed to pay for the debt? If growth is good, incomes will rise to help taxpayers. But how good will growth be in the wake of the deficits and growing government involvement in the economy?

Philip Cross outlined the other day how slow growth appears to be the new model for economic planning and thinking around the Western world. The growing acceptance of accelerating government intervention for environmental and redistributive reasons adds to the probability of prolonged periods of economic sluggishness.

Fiscal and economic history suggest that, as a result of the increase in government spending and borrowing, Canadian economic growth and incomes are likely to stagnate in years to come. Lakehead University economist Livio di Matteo tracked the link between the growing size of government and declining annual growth rates in a paper last year. As government’s share of the Canadian economy has grown since 1945, average economic growth has declined (see graph).

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Slow income growth and rising spending and debt is no way to run a household — or a government.

What’s gone wrong? A month ago, the National Post’s editorial board called for a bold Conservative platform. O’Toole and his party “should run a campaign that is unabashed in its commitment to individual liberty, free markets, fiscal sanity and respect for this country’s proud, if imperfect, past.”

But instead of offering “free markets” and fiscal sanity the Conservatives have joined the Liberals in a platform that proposes a growing “free” market system of government programs and spending filled with free money: free money to pay for a job surge and child care, free money for energy firms to develop carbon capture and double workers’ benefits, and free money for small business investors and creators of innovation.

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Rather than aiming to curb the growth in government, the Conservatives have joined the current global trend to increase the size and interventionist scope of the state — the assumption being that more government generates more growth, a claim that comes with a long history of failure but also a long list of leftist academic backers.

Just the other week, U.K. economist Michael Jacobs, writing in The Guardian, warned that Western economies can’t return to “business as usual” after the pandemic. “The old orthodoxy of free markets and hands-off government won’t cut it.” Jacobs need not worry: the old orthodoxy is dead.

Financial Post

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