Can Ottawa dodge the postpandemic money trap?

Justin Trudeau can thank Quebec Premier François Legault and the leader of the Bloc Québécois for helping him dodge a trap.

The Prime Minister, in full we’ve-got-your-back mode a few weeks ago, was making noises about the federal government playing a role in long-term care for seniors.

Given the dire COVID-19 outbreaks in long-term care facilities, people were already asking why Ottawa wasn’t doing more. Maybe it should fund a separate transfer payment for long-term care and set national standards, some said.

Then Mr. Legault weighed in with a warning: If Ottawa wants to start paying half of the health care costs, that would be great, he said. Bloc Leader Yves-François Blanchet complained the feds were using the crisis to intrude in Quebec jurisdiction.

Since then, Mr. Trudeau has been more circumspect about the idea.

That must have sparked a big sigh of relief among the Finance Department officials. The one reassuring thought they have had as Ottawa pumped out deficit spending on a scale not seen since the Second World War is that all this is temporary.

The idea that Ottawa might take on a specific, permanent responsibility for funding long-term care, with its built-in demographic pressures to increase spending rapidly for decades to come, would mean continuing increases in spending.

And that kind of thing is the real postpandemic trap for federal finances.

Avoiding it won’t be easy, because the policy and political pressures will be real, based on things that really matter.

Right now, many economists argue that the staggering deficit Ottawa is racking up in 2020-21 – estimated at $252-billion by Parliamentary Budget Officer Yves Giroux – is not cause for alarm.

Former parliamentary budget officer Kevin Page and two experts who joined him at the Institute for Fiscal Studies and Democracy, Mostafa Askari and Sahir Khan, just wrote a piece in The Globe and Mail that outlined why those sums won’t lead inexorably to crisis. Ottawa’s debt load is low and its big-spending measures are temporary: About 60 per cent is for temporary supports that will expire and another 30 per cent is cyclical, triggered by economic contraction, which will wind down as things improve.

Unless, of course, Ottawa starts doing new things. There will be pressure.

Part of it will be the postcrisis urge to change society. The campaign for a universal basic income, for example, has been renewed.

And inevitably, Ottawa will face pressure to help provinces deal with new spending demands. Cities will want recovery funding. There will be calls for health care improvements. In many provinces, long-term care clearly needs a revamp. Those pressures will be real. Politicians will want to be seen to respond.

But several provinces were struggling before the COVID-19 crisis. All already face pressures caused by an aging population that are causing health care spending to grow; for some it threatens to become unsustainable.

The feds, however, have put their finances on a sustainable track in recent decades. The PBO reported this year that Ottawa could increase annual spending by $41-billion without raising its debt-to-GDP ratio. That’s why Ottawa could afford to step in to backstop the country with emergency spending in a crisis.

The problem comes when the emergency winds down, and Ottawa faces pressure to keep backstopping the country. Taking more responsibility for health care and long-term care isn’t just expensive, it comes with demographics that drive rapidly growing costs. The proportion of Canadians over 80 will nearly double to between 7 and 8.8 per cent in 2038 from 4.3 per cent in 2018, according to Statistics Canada.

And while the big deficit will spark some calls for cuts, it seems unlikely that a population feeling vulnerable will want austerity, say, 10 months from now, when Canada will hopefully be emerging from the pandemic and Ottawa is budgeting for the next fiscal year.

The political question probably won’t be about balancing budgets. It still must be about making them sustainable. That means being wary of new commitments to permanent, accelerating spending.

Mr. Khan, of the IFSD, thinks Ottawa might manage the transition with one-time spending, perhaps even endowing trust funds with specific goals, so that the federal government can respond to some of the immediate postpandemic pressures without wrecking the sustainability of its finances. The feds’ sustainable finances, after all, have turned out to be useful in a pinch.

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