Debate about the sustainability of government debt is seldom about the debt itself – the financial burden we are imposing on future generations. After all, the well-being of future generations will depend on the investments we currently make (or do not make) as much as or more than the way in which those investments are financed.
The fact that the same people who raise concerns about unsustainable debt commonly support tax cuts, regardless of their impact on government finances, tells you that for many the real issue is not the debt. Trumpista Republicans are particularly obvious in that regard. And the same hypocrisy is evident in Canada when it comes to glaringly contradictory positions on tax cuts, deficits and debt.
There are, of course, limits to the foreign borrowing a country can prudently undertake. Repayment obligations to foreign creditors can require draconian austerity measures, as countries like Argentina, Greece and others have recently experienced. For Canada, however, the repayment obligations on our total debt, foreign and domestic combined, is relatively small in relation to our national income.
As Kevin Milligan, Trevor Tombe and other leading Canadian economists have pointed out, even with the huge amount of Covid-related health care, bridging and income support measures the Canadian government is currently undertaking, the interest payments on our total debt will still be significantly less than what we have readily managed in the past. As for the debt itself, it will gradually fall in relative size and significance as long as in normal times new debt accumulates at a lower rate than our rate of economic growth.
But if the debt itself isn’t a major problem, even in extraordinary times like this, what is the real issue that gives rise to the apocalyptical warnings of many politicians and commentators, particularly on the right? It isn’t the amount of borrowing per se; rather it is the extent of government involvement in the economy they are railing against.
When politicians raise alarms about the run-up of government debt what they are really decrying is the increased amount of public sector expenditures that the debt makes possible. They believe our economy should produce the goods and services that individual households and businesses want; in economic terms they believe resources should be allocated in accordance with private household and business decisions, not public sector priorities.
The problem with the misdirected debate about the sustainability of government debt – focused on the debt itself instead of the expenditures the debt makes possible – is that it diverts attention from the far more important question we should be addressing: What is the role of government in modern society – what is the right balance between private versus public sector spending.
In the midst of the pandemic there has been widespread agreement about the need for massive government spending. But as the pandemic and with it the pandemic-related spending subsides, there will be the issue of what level of government spending is needed in more normal times. Do we return to pre-Covid levels of government responsibility and spending. Or do we recognize the need for major change.
There are legitimate, though often exaggerated concerns that government bureaucrats can be excessively political, risk-averse and inefficient in what they are mandated to do. And that does raise important cautions about exactly what government should be responsible for. Nevertheless, I think any fair-minded person can recognize that the well-being of present and future generations will depend far more on the investments we must make collectively than the spending we can make on our own.
The pandemic itself has made clear the need for more basic research and health care system preparedness to avoid the calamity of new viruses and other public health emergencies in the future.
Massive investments will be needed to address the ever-growing challenge and effects of climate change. It is not just the efforts to reduce emissions that need to be supported, but also to mitigate the social, economic and environmental damages that we are already experiencing and that will in all likelihood escalate in the future.
There is the challenge of poverty and homelessness, combined in many instances with mental and physical wellness issues. We’ve recognized the unacceptability of these conditions during the pandemic; they will be no less acceptable when the pandemic disappears.
There is the ongoing challenge of meeting increasingly complex educational needs in a world where knowledge and skills will be of paramount importance in order for our youth to find and retain meaningful employment and income.
There are the unacceptable third world conditions in some First Nation communities. And there are the growing needs of many oil and gas, coal mining and other resource-dependent workers and communities that will require support to transition to other activities and industries in order to survive.
There are as well our global responsibilities. We are a rich nation, but our well-being and those of our children will never be secure if we fail to support the basic needs of people in much more difficult circumstances.
And there are many other challenges, challenges that will require more public as opposed to higher levels of individual and private sector spending.
The Reagan and Thatcher revolutions brought a relentless effort to reduce public sector spending, leaving more resources and spending power in the hands of individuals. But that will have to be reversed if we are to meet all of these needs. The question is how much more public sector spending should we support. That is the debate we will need to have. Then we can sort out the best ways of financing that spending – with more debt, higher taxes or some combination of the two.
The question of the appropriate amount of debt will be a much easier issue to understand and resolve once we’ve developed a consensus on what we are trying to do.
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