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Terence Corcoran: The new Liberal fiscal model is a deep black hole thanks to Chrystia Freeland

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Freeland’s budget Monday is expected to launch Ottawa into the fiscal stratosphere with the greatest peacetime explosion of debt and spending in Canadian history

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Remember way back to April, 2015. The last season of Mad Men was on TV, The Weeknd and Taylor Swift were at the top of the Billboard charts, and the Toronto Blue Jays had trounced the Yankees on opening day, with a home run from Edwin Encarnacion setting the stage for a major run that came close to winning the league baseball championship. Oh, and in Ottawa on April 21, 2015 — exactly six years ago — Finance Minister Joe Oliver delivered a balanced federal budget.

Actually, Oliver’s last budget as Conservative finance minister projected a small surplus of $1.4 billion. By the end of the fiscal year, Ottawa had actually slipped back to a trivial deficit of $600-million, essentially a balanced budget.

How far we have come in six years — as a country and as part of a global economic and monetary system. The idea of balance in government spending, of the need for caution and care in fiscal management of state finances, as been abandoned.

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It didn’t take long for Canada’s fiscal gears to shift. Joe Oliver and the Harper Conservatives lost the 2015 election, leaving the federal kitty open for the beginning of a Liberal raid. The Weeknd and Taylor Swift were still on the charts in March, 2017, when the first full-fledged Liberal budget outlined annual deficits of $20-billion for the next four years.

Finance Minister Chrystia Freeland’s Liberal budget Monday is expected to launch Ottawa into the fiscal stratosphere with the greatest peacetime explosion of debt and spending in Canadian history. In one key measure, the amount of real constant-dollar federal debt for every man, woman and child in Canada, is already at $35,000, having soared above the previous 1990s high of $33,000, a level that led to Ottawa’s 1990s’ fiscal crisis, spending cuts, tax increases and a 60-cent Canadian dollar.

But this time is different, they say. Propelled by a powerful confluence of events, ideologies and economic theories — from COVID to climate to ultra-low interest rates — Canada and the world have entered a new fiscal galaxy, one in which it seems that anything goes, where there are no real limits on what governments can do to boost jobs, growth and equity, and fund any green thing that comes into the minds of politicians and activists.

How Canada arrived in this new fiscal galaxy, floating off on a $1.3-trillion dollar debt balloon, can be traced to a number of underlying elements, some Canadian, others imported from the United States and elsewhere.

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First, there is nothing new in the motivations of politicians or in their mega-spending objectives. Across Canada and the United States, the items on the spending agenda — child care, home care, equality, climate, “infrastructure,” pharmacare — have been rattling around the activist community and the left for decades.

Second, expensive initiatives that require major spending and tax collections are hard to sell in normal times. The arrival of the COVID-19 crisis and the existing induced fear of catastrophic climate change are pre-existing political conditions for the current neglect of previous norms of government discipline. Both COVID and climate alarms are now being exploited to justify unprecedented expansions of government debt.

As Rex Murphy highlighted in a recent column, Chrystia Freeland thanks the god of COVID-19 for having “created a window of political opportunity” for government to launch childcare initiatives. Freeland is picking up on Prime Minister Trudeau’s earlier statement that the pandemic provides an “opportunity for a reset … our chance to accelerate our pre-pandemic efforts to reimagine economic systems.”

Trudeau, in turn, is regurgitating the themes and language generated by the great global build-back-better network at the World Economic Forum — a movement that seems to be converting western governments in to 21st century variants on George Orwell’s 1984.

A report in The Atlantic magazine this week summarized the new reset policy mood that is sweeping through Washington under President Joe Biden: “A president associated with the politics of austerity is spending money with focused gusto, a crisis isn’t going to waste, and Senator Bernie Sanders is happy.” With deficits and debt soaring, all earlier concerns about the need for fiscal discipline have been abandoned. Former Bill Clinton Chief of Staff John Podesta said “There’s definitely a shift towards a more progressive theory of how the economy works.”

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A third factor driving the debt explosion is the rise of new economic theories that claim massive government spending and deficits can lift economic growth without fear of generating economic crisis in the future.

The debt-is-painless and therefore effective has a formal label in economics: Modern Monetary Theory. The theory is almost impossible to explain and is the subject of raging debate among economists.

Former Bank of England Governor Mervyn King, in a piece titled “The ideological bankruptcy of modern monetary theory,” summarized the definition problem. “If you can’t explain something, try an abbreviation.” MMT, said King, is “a magic money tree. It’s a simple idea. It costs almost nothing to print money: the cost of printing banknotes is negligible compared with their face value, and even lower when the Bank of England creates money electronically through its so-called ‘quantitative easing’ programme (QE). That money could be given to the public — either directly or indirectly via the government — to enable people to spend more, so raising output and employment. We are all better off.”

That’s the theory, which Harvard’s Lawrence Summers, a former Obama economic advisor, has characterized as “voodoo economics.” MMT makes “ludicrous claims that massive spending on job guarantees can be financed by central banks without any burden on the economy.”

Invesco Chief Economist John Greenwood and Steve Hanke of Johns-Hopkins University recently called the idea “Magical Monetary Theory.” The doctrine “states that fiscal deficits don’t matter as long as countries borrow in their own currencies and inflation stays in check. This is like manna from heaven for proponents of more government spending and larger fiscal deficits.”

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Bank of Canada governor Stephen Poloz said in 2019 that MMT “is offering a free lunch, and most of us know there is no such thing.”

MMT has not been formally identified as official policy in Ottawa, either by the government or the Bank of Canada — even though Australian economist Bill Mitchell — said to have coined the MMT name — has described Canada as a potential “MMT poster-child.”  There can be no doubt, however, that MMT is an influence inside central banking and government finance circles.

MMT has been raging through the left wing economic world for more than a decade. Proponents see MMT — including massive government borrowing funded by central banks — as an opportunity. The theory is that the economy is operating at below capacity, and government spending — on anything from childcare to guaranteed incomes to green new deals and infrastructure — can boost the economy to its full potential. Once the economy is at full potential, the fiscal expansion can be pulled back to avoid the great risk of inflation.

A new report from the C.D. Howe Institute, however, warns that the inflation risk riding behind the massive fiscal expansion will not be so easily tamed. The inflation risk arises “not when government spends, but when aggregate demand in the economy exceeds the country’s aggregate supply.”

To avoid the inflation problem, government would cut spending and raise taxes before the crisis hits. As a result of government spending cuts and tax increases, the value of the Canadian dollar would be at risk, threatening a repeat of the 1990s fiscal crisis that sank the Canadian dollar and forced a great fiscal retrenchment.

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In the mid-1990s, Ottawa was forced to slash spending, in part by cutting transfers to the provinces who had to pick up the slack. But this time the provinces are already broke.

The fourth factor behind the massive Liberal fiscal expansion is the belief that billions of tax dollars are ripe for picking. That would supposedly smother excess demand. The left has successfully installed the idea that the money to fund the spending and reduce the deficits and debt in future can be extracted through higher taxation, especially on the wealthy and on corporations.

On Wednesday, the Canadian Centre for Policy Alternatives released a new report — eagerly distributed by the union-backed Broadbent Institute’s Tax the Rich campaign — listing Canadian billionaires by name. At the top of the list of corporate leaders to be raided for their cash is David Thomson, the 3rd Baron Thomson of Fleet and owner of The Globe and Mail. According to the CCPA report, Thomson controls assets worth $54-billion, a pile of wealth that apparently should be looked upon by government as a pool out of which to reduce its trillion-dollar debt.

Thomson and 46 other Canadian billionaires are said to hold $270-billion in assets — implying, one assumes, that much of the 2021 Liberal spending could be easily wiped out if only Ottawa had the political courage to take on the holders of wealth.

If that’s not the specific plan, it certainly encapsulates the thinking that’s driving Canada, the United States and much of the developed world toward an unprecedented expansion of government deficits and debt. There are supposedly vast pools of untaxed income and wealth.

These are also ideas that Finance Minister Freeland promoted long before the COVID-19 crisis in her 2014 book — Plutocrats: The Rise of the New Global Super-Rich and the Fall of Everyone Else — and in her public appearances. On the idea of taxing the rich, she once said, “It’s about us coming together and filling up the kitty,”

Thanks to Freeland and the new Liberal fiscal model, the federal kitty is a deep black hole from which Canadians will now have to pay — somehow — to fill. It all starts with Freeland’s budget on Monday.

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