Pay down the deficit? Never!

By Dian Cohen

Even before federal Finance Minister Bill Morneau told us that the federal deficit for 2020-2021 would be over $340 billion, commentaries about how the deficit would be paid down were emerging. Clearly, a deficit that is 10 times the “normal” amount and represents 14 per cent of all the dollar value the country produces in one year is a stunner. The immediate question for many commentators and politicians is, “Will it be austerity or sky-high taxes for the next few years?”
Hold your horses! Not so fast!! Let’s understand what we’re talking about and the circumstances in which we’re talking. Let’s pretend Canada is a household. The Canada household made $100,000 in 2019. Mr. and Mrs. Canada often spent a little more than that – maybe $101,000 but were confident they could recoup the money in the next couple of years because they would be making more. Suddenly, because of a catastrophe, Mr. and Mrs. Canada lost their fulltime jobs and were making a lot less without a clear picture of when they would get back to their normal income. Not only that – they were faced with spending $115,000 in 2020. Clearly, they would have to borrow a huge amount of money (if they were credit-worthy) and pay interest on it until it was repaid. Quel horreur! They’d have to pull in their belts and work even harder for a long time and have a lower standard of living.
Okay, so now let’s talk about Canada the country and pandemic times and how this time it really is different. For starters, the household “Canada” will not live forever and will not forever be able to make money to pay off their household debt. The country Canada has much better options – it can look forward to planning continuous economic growth once we’ve found ways to overcome or live with the virus.
Not many of us are around to remember the financing of World War 2. Military production and defence spending pushed the annual deficit to 21 per cent of GDP in 1943 – in today’s dollars, that would be about $500 billion. How did it get paid off? Well, Canadians bought lots of Victory Bonds, and that helped. But basically, it never got paid off – it stayed on the books year after year (thereby classified as national debt); interest was paid to Canadians (I can remember clipping coupons from my Victory Bonds) – and the economy simply grew out of it. In other words, as the economy grew, the national debt became a smaller and smaller proportion of the annual value of all goods and services produced. The best thing about the debt and deficit today is that interest rates are almost zero. It will cost almost nothing to carry the debt for the next few years.
This is not a predication – the future is unknowable. But we must acknowledge that so far the government’s plan of getting the economy on a stable footing as soon as possible is the only way we will ever get on a recovery track.
Dian Cohen is an economist and a founding organizer of the Massawippi Valley Health Centre.

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