Spending

The Trudeau government used the pandemic to engineer long-term spending increases

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In response to the pandemic, governments across Canada have launched an unprecedented wave of spending. In Ottawa, the federal government sought to make this wave permanent.

In 2020/21, federal spending rose 73% to $644.2 billion before declining 21% to around $508 billion in 2021/22. Total provincial government spending increased 9.2% in 2020/21 to $504.4 billion, and another 5.6% to $532.9 billion in 2021/22.

As a result, between 2019/20 and 2020/21, the federal deficit-to-GDP ratio (an indicator of a jurisdiction’s ability to service its debt) fell from -1.8% to -13.2%, while the collective deficit/GDP ratio The provinces’ GDP ratio fell from -0.8% to -1.9%. As a result, the federal net debt-to-GDP ratio has fallen from 33% in 2018-19 to almost 50% in 2021-22, while the provincial collective ratio has fallen from 29% to around 31%.

At the provincial level, budget deficits appear to be positively correlated with the intensity of the impact of the pandemic in terms of the number of cases per capita by province, although this is not so evident at the federal level. Indeed, at the federal level, about half of the deficit incurred during the pandemic was related to COVID-19 for health transfers or income support to individuals and businesses, while the rest was due to expenditures unrelated to the pandemic, representing a permanent and long-term build-up. federal spending.

In other words, alongside substantial amounts of income support to individuals and businesses with emergency response benefits, Ottawa has designed a substantial permanent increase in its own spending levels during the pandemic that deserves attention. particular.

The 2022 federal budget projected that (even after lower post-pandemic spending) compared to fiscal year 2019-20, total spending in 2022-23 would be approximately 27% higher, an average annual increase of 9 % per year. This represents a larger footprint of federal government spending in the long run and will become a classic example of Peacock Wiseman’s spending shifting hypothesis.

British economists Alan Peacock and Jack Wiseman have observed that British government spending rose dramatically during the world wars, but never subsequently declined to pre-war levels, settling rather on a new plateau. When financing public spending, they argued, it was ultimately limited by tax revenues and constrained by what the public saw as tolerable levels of taxation.

But a social crisis like the war narrowed the gap between desired levels of public spending and what the public saw as a tolerable tax burden. However, once the social crisis was over, the new revenues remained, allowing the government to permanently fund spending levels at a higher level than before the crisis. Today, post-pandemic tax revenues have increased significantly in Canada, giving Ottawa the temptation to keep spending.

In summary, during COVID, revenues for both levels of government first declined and then recovered, with provinces initially recovering faster in part due to transfers from Ottawa. Both levels have also seen increased spending with an associated rise in budget deficits and debt. However, collectively, the provinces of Canada have suffered more modest effects in terms of lower deficits and, ultimately, debt-to-GDP ratios compared to the federal government, which has used the pandemic as an opportunity to engineer an increase. long-term expenses.

The opinions expressed in this article are the opinions of the author and do not necessarily reflect the opinions of The Epoch Times.

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Livio Di Matteo is Professor of Economics at Lakehead University and Senior Fellow at the Fraser Institute.