Canadian Prime Minister Justin Trudeau listens to Finance Minister Chrystia Freeland after making housing-related announcements ahead of the 2024 federal budget at Sunset Community Center in Vancouver on March 27.Jennifer Gauthier/Reuters
John Rapley is a writer and academic who lives in London, Johannesburg and Ottawa.His books include: why empires collapse (Yale University Press, 2023) and Twilight of the Money Gods (Simon and Schuster, 2017).
Canadians will once again be focused on taxes and spending when the federal budget is decided on Tuesday. Regardless of whether this budget addresses this topic, it will likely end up with tax increases, as demographic and economic trends inevitably drive up government costs.
Let’s start with the big issue: aging. One of the great achievements of the postwar social contract was that people were able to live longer than ever before. But it comes with new expenses. After several decades of fairly stable conditions, the economically inactive share of the population began to increase at the beginning of this century. However, whereas previously the inactive population consisted mostly of school children, now most of them are pensioners.
Although both groups are net consumers of resources, spending on children can be considered an investment because it creates workers who ultimately contribute to production. However, very few retirees re-enter the workforce in any meaningful way.
Therefore, although output will not increase as much as before, spending on social security, pensions, health care, etc. will increase more than ever before. Of course, such spending could also be limited, as is already being done, by revamping the health system and making greater use of private services to complement the public system. However, although this reduces government spending, it does not actually result in any savings, as it turns people’s taxes into private taxes.
For example, consider our southern neighbor. Canadians sometimes complain that they pay more in taxes than Americans, but that’s largely due to America’s lack of universal health care. Instead, Americans either go without health care (which helps explain why they die on average four years younger than Canadians) or have to buy health insurance.When insurance premiums are added to taxes, Americans often end up paying They value these services more than Canadians. So if we drastically change our healthcare model, we’re going to be robbing Peter of payments from Paul. So the question is really not whether we can create a leaner state to avoid higher taxes, but whether we want to create a less generous state.
Even a silver bullet, a return to economic growth that increases tax revenues, is unlikely to save us. This is because the aging of society itself is increasing demand for public services, and because much of the economy’s output must be maintained through consumption, it is also reducing the average economic growth rate.
It is widely accepted that more business investment is needed to restart Canada’s nearly halted growth. But how? One school of thought holds that tax cuts pay for themselves by increasing private investment, which leads to long-term growth in the economy. However, recent evidence does not support this belief. Trump’s tax cuts in the US mainly led to stock buybacks and dividend payments, which revitalized the economy, but also widened the deficit. A 2020 study by the International Monetary Fund suggests that this is due to the concentration of companies in developed countries, reducing the investment benefits previously provided by tax cuts.
Therefore, Canada will likely need to use public investment to attract private investors, as the United States currently does. In any case, Canada has been stingy with public spending for decades, and as a result, the country’s public net worth is now negative. In particular, Canada needs to invest in housing, infrastructure, and perhaps even subsidies for new industries — all of its major trading partners are doing so, and if it doesn’t, emerging industries will be wiped out by cheap exports. Because you end up doing it. But unlike the US, which can afford to hold the world’s reserve currency, Canada can’t borrow all the money to do it (and it’s not even clear the US can do it much longer).
Finally, there is increasing external demand for economic historians. Adam Tooze called it the era of polycrisis. The world is becoming more risky and unstable. Our allies are rapidly increasing defense spending to meet NATO’s agreed-upon target of 2% of GDP, and we will no longer tolerate Canada operating under the radar. Additionally, pandemic preparedness (COVID-19 was not a flash in the pan) and the increasing shocks of climate change, of which wildfires were just the beginning, will make mitigation and remediation costs a regular part of life. will probably occur.
If we remain silent, these costs will only increase. For example, the huge increase in debt during the pandemic is probably the price we paid for not being prepared, or you could call it the premium for our complacency. So you can pay now or pay more later. Either that or renegotiate the social contract between people and the state. Canadians would be better off facing these trade-offs sooner rather than later.
