The Shape of Federal Fiscal Things to Come: Chrystia Freeland’s 1 Percent Solution

 

Yesterday’s Federal Fall Economic Statement is actually quite a remarkable document. On the one hand, given the expectations being raised that the deficit for 2020-21 might reach $450 billion, coming in an $381.6 billion has probably caused many to heave a sigh of relief.  That was probably the intention. Of course, that $381.6 billion figure is the lower bound estimate given economic assumptions and could be as high as just under $400 billion.  Moreover, none of the scenario deficit projections were factoring in the $70-$100 billion in stimulus spending that was to be spread over 3 years once the pandemic was brought under control.

 

The Fall Economic Statement appears to be as much a political as it was an economic and fiscal document in that it continues federal spending and support for the pandemic as well as positions the government for substantial spending announcements of stimulus spending in the spring probably in advance of a federal election once the pandemic appears to be under control – which it currently is not. 

 

If one takes the base case scenario, revenues for 2020-21 will be $275.4 billion and spending $641.6 billion for a deficit (after actuarial adjustment of federal liabilities – the recent twist in federal finance reporting) of $381.6 billion.  For 2021-22, revenues are expected to rise to $335.9 billion and spending decline to $441.5 billion for a deficit of $121.2 billion.  After that, deficits will continue to decline reaching $24.9 billion by 2025-26 and returning us to the deficit range of the 2018 to 2019 period.  This period of deficits will take the federal net debt from $772.1 billion in 2018 to reach $1.494 trillion by 2025.

 

The document is quite clever because it lays out a fiscal plan with a target – which critics have been clamouring for – without actually stating there is a fiscal target.  The pandemic is essentially a dis-equilibrium situation for the federal government’s finances and the federal government hopes to return to its version of equilibrium finances by 2025 at which point revenues will be higher at $417.3 billion and spending at $484.4 billion.  

 

 If one takes their GDP growth forecasts into account, the deficit to GDP ratio for 2020-21 is actually just over 16 percent but will decline to 5 percent the year after and then essentially reach 1 percent.  Prior to the pandemic, a deficit to GDP ratio of 1 percent was what the federal government saw as perfectly reasonable given low interest rates and GDP growth rates and that is what they want to get back to.  It is the 1 percent solution.

 

To place all of this in very long term visual perspective, data from the Jorda-Schularick-Taylor MacroHistory Data Base, Statistics Canada, my federal fiscal history and the 2020 Fall Economic Statement is used to generate figures 1 and 2 below. Figure 1 shows real per capita federal revenues and spending from 1870 to 2018 and then forecasts from 2019 to 2025.   

 

 

 

If all pans out as forecast, then the surge in spending and revenue collapse of the pandemic will subside with real per capita revenues and spending eventually up 2.5 percent and 3.4 percent respectively from their 2018 amounts.  That will be viewed as a perfectly acceptable growth when spread over 5 years. Figure 2 presents the deficit to GDP ratio with the pandemic showing the second largest deficit to GDP ratio in history but with a return to roughly where it was just prior to the pandemic.

 

 

 

This is the shape of federal fiscal things to come, assuming the federal government’s vision pans out.

 

 

 

 

A Unity Circle: Celebrating Thunder Bay

The new Thunder Bay City Council that will be elected in October of 2018 will have a number of economic and social challenges on its plate but there is one item that should be a source for celebration.  The year 2020 will mark the 50^th year of the amalgamation of the twin cities of Port Arthur and Fort William and the rural townships of Neebing and McIntyre to form Thunder Bay.  The urban history of the Lakehead communities actually goes back to the late nineteenth century and both Port Arthur and Fort William obtained city status in the first decade of the twentieth century as the great boom drove their urban growth and development. 

I always thought it was somewhat of a shame that not more effort was made to celebrate the centennials of the twin cities circa 2006-07 but I suspect the history of urban rivalry between the two cities was such that no one really wanted to deal with it.  However, we now have an opportunity to celebrate amalgamation and I think it should go beyond simply a number of commemorative events and the publication of self-congratulatory histories.  I think an effort should be made to leave behind something concrete that adds to the city’s environment and is a legacy for the future.

As a result of its urban history of being two separate cities, Thunder Bay has always lacked a more centrally located focal point that could serve as a gathering place for the public to celebrate events.  Many cities around the world often have public squares or sites that can serve as gathering points for celebrations and events and that act as emblems for the city.  Think of Trafalgar Square in London, for example or Washington Square or Times Square in New York or the iconic four columns in Barcelona.

We of course cannot reproduce these types of landmarks nor should we but I think as a city we can take the step of creating a public space that celebrates the creation of Thunder Bay as well as points the way to a future that includes all its residents.  Somewhere in the Intercity area, preferably close to the banks of the McIntyre River – the old boundary between Port Arthur and Fort William – we should consider putting into place what I would like to call Unity Circle.  It would be a celebration of amalgamation and the bringing together of the twin cities to form Thunder Bay and would also look towards the future by including First Nations. 

Unity Circle would be a public space in the Intercity area that would contain a number of columns - I suggest six large columns of identical height arranged in a circle with the columns representing the original four municipalities that came together to form Thunder Bay, the City of Thunder Bay and Fort William First Nation. At the center of Unity Circle there would be a flame that would burn perpetually.  I think a message of unity is very important given the many social challenges that have faced Thunder Bay over the last decade and may help represent a way of moving forward into the future.

So, it is just an idea.  The actual piece of land and location is of course one of those details best left to the politicians and administrators and community leaders who make these decisions.  The design of the space and a suitable set of commemorative structures is also of course up for discussion and debate. What is most important right now is the concept.  The concept of a Unity Circle is something that celebrates our history and looks forwards by leaving the legacy of a substantial central public space that could form the focus of future public community events.  I think it is worth consideration.