I had the opportunity to present via Zoom at the House of Commons Standing Committee on Finance today. It was a very good experience with interesting questions and discussions afterwards. Here is the prepared text of the remarks I delivered during my five minutes:
Dr. Livio Di Matteo
Professor of Economics, Lakehead University, Thunder Bay, Ontario
Presentation for House of Commons’ Standing Committee on Finance, Pre-Budget Consultations in Advance of the 2021 Budget, December 11th, 1-2pm
Good Afternoon:
Thank you for the invitation to speak at these Pre-Budget Consultations in Advance of the 2021 Budget. I commend the Committee for reaching out into the academic community of economists for public input on this important process.
It has been said many times that the COVID-19 pandemic is an unprecedented event in recent history, and this context frames my input into the federal budgetary process.
The Fall 2020 Economic Statement documented the unprecedented effects and response to the COVID-19 pandemic. For fiscal year 2020-21, real per capita revenues in $2014 will have declined by 20 percent from year previous while spending is up by 70 percent. In real terms, this is the highest per capita amount ever spent in Canadian fiscal history (nearly $16,000 in 2014 dollars). As a share of GDP, the projected deficits will be the second largest in Canadian fiscal history- exceeded only by World War II.
The Fall Statement reveals spending eventually declining and a deficit approaching one percent of GDP by 2025-26 but also a federal net debt rising to $1.5 trillion and a net debt to GDP ratio remaining in excess of 50 percent. Despite current low interest rates making current debt look manageable, it remains that any sudden future shocks – to the economy or even interest rates - could be more difficult to manage as debt burdens rise.
The size of the initial fiscal response to the onset of the pandemic in the February to April period of 2020 was appropriate. However, the continuing unprecedented fiscal response generated results that have not paralleled the fiscal support provided. The fiscal assertiveness of the federal response to the pandemic was not matched by assertiveness in targeting the response as might have been afforded under the federal spending power or the power of quarantine that exists under the Constitution.
Moreover, much of the spending went to individual income transfers in excess of the pandemic generated income losses. After all of this unprecedented response, we are now in the midst of a more severe second wave that threatens the economic recovery that began over the summer.
The Federal 2021 budget must learn from the past and better target any additional projected fiscal response with a view to long-term economic recovery and growth. The additional spending must be directed towards productivity boosting investments. Even prior to the pandemic, the business investment to GDP ratio had been faltering. While the short-term income support provided at the peak of the pandemic was important, if we are to continue to spend at these record levels, then there must be more to show for it.
Government spending priorities should be directed towards initiatives for boosting our long-term productivity via investment in physical and human infrastructure. Public infrastructure in roads and transport, bridges, communications, schools, health care, water, sewer and environmental systems require investment. Education has taken a major blow during the pandemic and we need to ensure that students at the elementary, secondary and post-secondary level, do not fall behind in educational achievement and opportunities and reduce future labour productivity growth.
Then, there is the matter of our national defense and security in a more multi-polar and unstable world that requires equipment and resources and vision. And there is a need for private sector investment in sectors producing goods and services that we can export and continue to earn our way in the world. If our export markets falter and our incomes drop, there will be no international emergency response benefit payments offered to us. The federal government, therefore, should work with the private sector in assessing its investment needs.
Historically, excessively large amounts of government spending are not well correlated with long-term economic growth. It is not that government cannot help the economy. However, effective government requires knowing when to spend and when not to spend and more importantly, what to spend the money on.
If we are to embark on a program of infrastructure spending, we must ensure that projects with the best return are selected. Assorted public projects should be assessed by an arms-length panel of key leaders with expertise in business, accounting, engineering and economics who can make recommendations in areas of national interest. It would be extremely unfortunate if federal infrastructure money flowed to community or sports centres rather than say roads and sewers simply because "shovel ready" plans exist for the former but not the latter.
Thank you.
