Ontario Finance Minister Rod Phillips has tabled updated estimates for the impact of the coronavirus pandemic on the Province's finances, and very scary they look. The projected shortfall for the fiscal year (April-March) is now C$ 38.5 billion, up from the original budget projection of $ 9 billion and more than double the $ 17 billion tabled back in March, when the pandemic first hit. Let's take a quick look at the numbers, and then muse a bit about what the province might do in the future.
One thing we need to get straight from the outset. Introducing the update, Phillips told the assembled media that Ontario is in a recession. It isn't. A recession is normally defined as two consecutive quarters of declining GDP, and that's what Canada experienced in the first two quarters of this year. However, as I have argued here on several occasions, at the moment it's more useful to look at monthly data. Canada and Ontario experienced unprecedentedly sharp declines in GDP in March and, especially, April, but recovery began in May and accelerated in June, and there was plenty of momentum going into Q3. The recession, painful as it was, is technically over.
That's important, because barring a second wave so serious that we all get locked down again, the Province's fiscal situation should improve through the remainder of the fiscal year, as the economy slowly heads back towards pre-pandemic levels. If we look just below the surface of Phillips's headline deficit number, we see that he and his staff are expecting revenues $ 5.7 billion lower and spending $ 13.1 billion higher than in the March (i.e. early pandemic) fiscal update. Those numbers may be reasonable estimates: very few people were correctly anticipating the scale of the pandemic back in March, so the duration of the revenue losses and spending hikes could not be readily predicted then.
In addition, however, Phillips is including a massive $ 9.6 billion contingency provision, against the possibility of further shocks in the months to come. The text of the release is not entirely clear, but that appears to be on top of $ 6.8 billion in contingencies that were included in the March update. This looks like very conservative budgeting indeed, which is in no way a criticism under current circumstances.
Turning to what may come next, there are worrying signs that Conservatives, whether at the Federal or Provincial level, have learned little from past crises. The candidates in the Federal Conservative leadership race that is now nearing an end have all fretted about the burden on taxpayers created by the spending initiatives launched by the Trudeau government in recent months, without in any way hinting at what they themselves might have done differently if they had been in power. And in response to questions about the Ontario fiscal situation revealed by Rod Phillips, Doug Ford stated that he was opposed to higher taxes. The clear implication, both Federally and Provincially, is that spending cuts are on the way.
Really? We only have to go back a few years, to when Stephen Harper was Prime Minister and Jim Flaherty was Federal Finance Minister, to find an alternative approach. Harper was as fiscally conservative as they come, yet he realized that in the wake of the global financial crisis, fiscal austerity was the worst possible approach. He allowed the Federal deficit to climb to unprecedented levels a decade ago, and in so doing ensured that Canada avoided some of the worst effects of the crisis.
The economy is going to have ample slack for years to come, courtesy of the pandemic, so the risk of triggering inflation is very small. Consequently interest rates are set to remain low, so even if you are not a fan of Modern Monetary Theory, you should be able to accept that continuing to run deficits post pandemic in order to rebuild the economy will not represent an unfair burden on generations of taxpayers.
You don't just have to take my word for it. Here is a fascinating exchange between Keynes and some other distinguished economists of the day (early 1930s) on precisely these issues. Keynes was right, but somehow we still have to keep making these obvious points over and over again.
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