Centre for Future Work Economist and Director Jim Stanford was invited to present testimony to the House of Commons Standing Committee on Finance, as part of its annual pre-budget hearings. Here are his opening remarks, presented on October 19, 2023.
Dear Members of the Committee;
Thank you very much for the invitation to appear before you today. I am Jim Stanford, Economist and Director of the Centre for Future Work, a labour economics think tank with offices in Canada and Australia.
I will focus my brief opening remarks on four specific topics.
1. Much public commentary in the lead-up to the 2024 budget has focused on the size of the federal deficit and whether it is too big. Some important perspective must be maintained on this question.
Canada’s deficit is very small by global standards. The latest Fiscal Monitor report from the IMF, released last week, shows Canada’s general government operating balance is the 2nd smallest of any G20 country: at just 0.7% of GDP. Second only to Saudi Arabia, and smaller than any G7 country.
OECD data suggests Canada’s general government deficit is even smaller: just 0.4% this year as a share of GDP. That’s the 7th smallest of any of the OECD’s 38 member countries. Canada’s deficit is one-ninth the size of the average OECD deficit (3.6%).
The contrast between Canada and the U.S. is very instructive on this issue. The U.S. federal deficit is almost 10 times larger, relative to GDP. Around 7% of GDP (adjusted for the cancellation of the Biden administration’s student loan proposal). The U.S. economy grew 2.1% in the second quarter of 2023, whereas Canada’s shrank slightly. And U.S. inflation has been comparable to Canada’s – in fact, at present it is slightly lower. It seems that the U.S. is pursuing a more successful approach right now, combining fiscal support with monetary tightening, for bring down inflation without stalling the whole economy.
The large deficits which were incurred during the worst stages of the pandemic – and for good reason – have been almost entirely eliminated. The deficit for this fiscal year will be less than one tenth as large as the peak deficit during the pandemic.
Canada’s strong recovery from the pandemic, combined with the impact of nominal GDP growth on government revenues, have made budget repair faster and stronger than expected.
I expect the government will continue to outperform its official budget projections in coming years. This is consistent with the tried and true practice, pursued by Finance Ministers of all political stripes, to “underperform and overdeliver” – in other words, to build deliberately pessimistic assumptions and contingencies into their budget forecasts, in order to “surprise” voters with good news later on.
An illustration of this was provided in the 2022-23 fiscal year. The government ran a surplus of $3 billion over the first 11 months of that year. Then, suddenly, discretionary decisions were made in the last month (including pre-funding various programs which will have effect in subsequent years) to use up that surplus and broadly match the original expected budget balance. This confirms the strong momentum of the government’s underlying fiscal position, which is continuing despite the slowdown in economic growth.
In short, while Canada faces several significant economic challenges at present, the deficit is not one of them. Concern with the deficit is overshadowed with more pressing priorities. Supporting Canadians through pressing challenges like the cost-of-living crisis, the housing crisis, and climate disasters is more important than eliminating a politically symbolic but economically insignificant deficit.
2. Claims that the federal deficit has been a significant cause of Canada’s recent inflation problem are not credible.
This argument depends on a prior assumption that inflation was caused by excess aggregate demand in the domestic economy. That assumption is not valid in the current inflationary episode. Inflation since 2021 was driven by a combination of supply side shocks, shortages of key commodities, consumer desperation after the lockdowns, and then an energy price shock. The impacts of all of those factors were made amplified by unusually high profit margins – which reached an all-time record share of Canadian GDP in 2022.
If we compare international data on inflation, there is no correlation between the size of a country’s deficit and its rate of inflation. Some countries with larger deficits than Canada (like Japan) have had slower inflation. Some countries with smaller deficits have had higher inflation.
Obviously, this inflation has been a global phenomenon resulting from the supply side and energy price shocks that followed the pandemic and other crises in the world economy. Canada’s inflation has been less severe than most other countries, and bears no relationship to our deficit.
In the macroeconomic context, it is the size of government deficits in national accounts terms, not public accounts, that matters for aggregate demand. (Public accounts include many non-cash accounting measures which do not affect real spending in the economy.) In national accounts terms, the federal budget is already effectively balanced: with a deficit of just 0.3% in the latest quarter. A deficit of that size can have no conceivable impact on economy-wide price trends.
3. Notwithstanding the lack of connection between the deficit and inflation, there are things that fiscal policy can do to help bring inflation down, as well as alleviate its consequences for the hardest-hit Canadians.
The federal government can play a role in reducing cost pressures that emanate from the actions of private companies. Priorities in this regard would include support for the rapid expansion of affordable and non-market housing, and a national pharmacare program to bring down the price of drugs for Canadians.
Continuing and expanding targeted fiscal supports to Canadians hard-hit by inflation would also help. The expanded GST credit is a good idea, and should be maintained; the Canada Housing Benefit top-up also helped, and could be repeated this year.
Incremental taxes on the profits of companies which have contributed to Canadian inflation through historically high profit margins would help to redistribute the effects. The federal government has done that already for banks and insurers. The current 2% tax on share buybacks is also helpful, but too small. Other industries which have contributed so much to Canadian inflation, and enjoyed unusually high profits as a result, include the petroleum industry and supermarkets and food processors. The government should consider those industries for additional corporate taxes.
Once we agree that the deficit has had no impact on post-COVID inflation, then government can fulfil its responsibility to assist in reducing inflation (and its effects) through new programs like these.
4. The Made in Canada strategy for boosting the domestic presence of clean energy technologies and manufacturing is having a very important and positive impact in stimulating new investment and employment in Canada.
The government’s decision in the last budget to implement measures that are broadly proportional to the U.S. Inflation Reduction Act was appropriate and effective. We are seeing a surge in keystone investments in clean technology, including automotive-related projects, that positions Canada well for the next generation of these industries.
These measures should be continued, and strengthened with additional performance requirements to ensure that Canadian communities and workers benefit fully from the development of these industries.
Thank you very much for your attention, and I look forward to your questions and discussion.