Alarmed by food, home and gas inflation, voters are starting to see that deficits do have costs, writes Jack Mintz in the Financial Post. Below is an excerpt from the article, which can be read in full here.
By Jack Mintz, November 23, 2021
Recent headlines that last year, for the first time in 50 years, Albertans received more federal spending dollars than they paid in taxes may suggest to some that maybe Albertans haven’t been treated so unfairly after all. But it’s a mistaken argument. With 2020’s federal spending binge of $635 billion, more than twice the $300 billion Ottawa collects as revenue, just about every body in Canada received more in spending than they paid in taxes. But that’s only because a gigantic tax bill was deferred. It will eventually come due and will have to be shouldered. There is no free lunch.
The 2020 spending binge was needed to keep the economy afloat during the pandemic. Eventually, however, the deficit that financed it will have to be covered by higher taxes, less spending or more borrowing. If Canada returns to the good old days when each Albertan paid $4,000 in net transfers to other provinces — almost a nine per cent tax on personal income — Albertans will be hit with more than their fair share of these costs.
My colleague at the School of Public Policy at the University of Calgary, Robert Mansell, is the dean among economists when it comes to thoughtful analysis of federal-provincial transfers. Going back as far as 1995, he and his co-author, Ronald Schlenker, have experimented with various approaches to accounting for federal deficits when measuring interprovincial transfers.This is not as simple a matter as you might think. It depends on how deficits are dealt with in later years. When fiscal policy tightens, governments typically avoid raising taxes or cutting spending on the poor. If so, richer provinces like Alberta, Ontario and British Columbia will see a rise in transfers to other provinces. On the other hand, if the federal government splurges on policies that benefit the rich, such as electric cars or licensing restrictions, net transfers from wealthier provinces might well decline.