What’s next: higher taxes or program cuts?

In an attempt to bridge the economic chaos brought on by the pandemic, Canada has had to take on massive amounts of new debt, largely funded by foreign lenders.

Canada’s accumulated deficit last year amounted to $685.45 billion, the highest in Canadian history. With all the COVID-19 related emergency spending programs, even the government agrees it will likely balloon to more than a trillion dollars for fiscal year 2020-21.

Generally, the rule of thumb is that in good times governments reduce debt to give them more wiggle room to bail out the economy with more spending in bad times.

The government has the spending portion right during the pandemic, most of which has been praised and surprisingly adaptable as the economic situation evolved. Unfortunately, the government increased spending in each year since it came to power in 2015, allowing the debt to increase in those years as well.

The finance minister is betting that the post pandemic economy and growth in the gross domestic product (GDP) will solve the problem by generating sufficient revenue to bring the debt under control.

In other words, the government doesn’t think it will have to raise taxes or reduce program spending to achieve its goal. Those are the only tools the government has to manage the debt — economic growth, taxes and spending cuts.

That’s putting a lot of faith in a rebounding economy that many financial experts believe might not be so vigorous. For example, many businesses are reassessing how their workforce functions and perhaps keeping a greater portion of their staff working remotely from home. That will reduce their need for space in office towers across the country and ultimately the value of commercial real estate markets.

The agricultural economics department of the University of Alberta is seeing a potential change in the demand for certain agricultural products. The break in the beef and pork supply chains has many consumers moving away from meat to find other dietary substitutes. When the supply chain is fully restored, it is projected that not all consumers will come back to these products.

Almost 60 percent of GDP is funded by household income. About half of the workforce is female, many of whom have either lost their jobs, taken unpaid leave of absence or reduced hours of work to take care of their children. The lack of sufficient quality day care will certainly mean that some of them might not be able to contribute to household income if the school system doesn’t fully return to normal. And, there is no guarantee that there will be sufficient jobs for them when this is over.

The airline industry doesn’t think that travel demand — either business or consumer vacation travel — will fully bounce back any time soon. Social distancing and fear of occupying such close quarters are leading some airlines to believe it will take years to recover with a resulting shrinkage in their workforce.

So, it doesn’t appear that economic growth will solve the government’s problem, which leaves tax increases and reductions in program spending. It is hard to tell, however, because the government has not yet presented a budget that outlines the extent of the problem.

Bob La Riviere has provided communications and marketing consulting services to private and public sector enterprises across Canada for 50 years.

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