Financial anxiety amongst Canadians is at an all-time high. From food, energy, housing, transportation, Canadians across the economic spectrum are worried about maintaining their living standards as they grapple with a cost-of-living crisis driven by interest rates, inflation, along with systemic supply shortages for fundamental social and economic infrastructure like housing and healthcare services.
This year, food banks and other programs serving the vulnerable are anticipating a 60% increase in usage of their services by Canadians; Canada’s newspaper of record recently published an article titled In Vancouver, some residents resort to dumpster diving to combat high food prices. Higher interest rates amidst an existential housing crisis have exacerbated housing unaffordability for most home buyers who rely on a mortgage in order to own their home. For all home buyers who need a mortgage, housing affordability is defined by their monthly mortgage payment, not their purchase price, hence higher interest rates have eroded affordability for many would-be homeowners, meaning many are forced to become renters, which is precisely why monthly rent rates have ballooned across the country.
We are seeing disheartening headlines about how the affordability crisis even impacts the socioeconomic elite like Victoria's Mayor Would Need Another Mayor As Their Roommate To Buy A Home. In fact, a recent Angus Reid survey reports that “Little wonder then, that fully one-in-three (34%) Canadians say they’re in either “bad” or “terrible” shape financially.” These headlines and statistics are shocking for Canadians, given our self-image as a prosperous member of the G7 club of industrialized economies.
Politicians know that they will be punished at the ballot box if they are perceived to be unconcerned or ineffective at helping Canadians, so it is not surprising that we are seeing lots of nice-sounding policy rhetoric and well-calibrated sound bites designed to make voters think that politicians and the members of platinum-pensioned mandarin class who enjoy enviable job security and superior employment benefits, are truly empathetic about the day-to-day financial challenges faced by regular Canadians who are struggling. However, it is going to take a lot more than just rhetoric, well-choreographed press releases, policy announcements, and political platitudes to effectively address the affordability crisis and the ongoing erosion in Canadian living standards.
To have any chance to alter the otherwise negative trajectory of Canadian living standards in the years ahead, policy makers must ensure that their policy decisions are coherent with basic financial and economic principles.
At the risk of stating the obvious, affordability is a function of two basic variables: Costs, and the ability to pay for those costs – Income. In a globalized economy, many costs are set by the global market which policymakers have little control over. Therefore, policy makers need to focus on facilitating the economic conditions to improve income, specifically, per capita income, not just aggregate income, because as costs rise for each individual, the only way individuals can maintain their standard of living is for their incomes to increase on a per-person basis.
Productivity is the key factor needed to ensure higher incomes can be paid to workers in a sustainable way. There is a significant correlation between productivity and income, because all else being equal, a highly productive economy will result in high median incomes. High productivity can also help lower costs and improve affordability as well because high efficiency is an inherent benefit of a high productivity – thus unit costs for goods and services will be lower if they are produced by a more productive workforce and this also improves the competitiveness of the organizations that are providing those goods and services.
What can policy makers do to encourage high productivity? Investments in technology, workforce competitiveness, relevant infrastructure and industrial capacity can lead to productivity improvements. However, not all investments are equal in improving productivity. In most successful economies, policy makers rely on the marketplace to price and allocate capital to investments that will be most productive. Even in ostensibly socialist economies that are successful, market dynamics are incorporated for economic progress. Investment in projects that are primarily driven by a political or ideological agenda are notorious for ultimately being a waste of money, or at best, offer relatively modest positive economic outcomes for the amount of money expended. Furthermore, there is strong evidence that delays and cost overruns are nearly inevitable with large scale public projects, not because the civil service isn’t professional, well-intentioned, or skilled, but because there is no practical way to impose the cost of poor financial or operational decisions on the politicians and civil servants who are responsible for developing and implementing policy. In contrast, if a private sector project goes over budget, the owners and employees pay the price through lower rates of return on their capital (or even suffer financial losses), and/or reduced compensation. This ability for private sector players to tie financial outcomes of capital decisions to renumeration for the individuals responsible for the overall success of projects and investments imposes a real discipline on capital investment decisions in the private sector.
What can policy makers do to attract the necessary financial capital and harness the competencies of the private sector to invest in economically productive projects? People and money go to where they are treated best in the long run, so it is important to have well-calibrated tax and economic policies that attract the best human and financial capital to have a successful, economically sustainable society where people can thrive. This means our public policies and programs need to be effective and financially sustainable. To achieve this, our policy makers need to remember some basic principles:
Contrary to what advocates of Modern Monetary Theory may hope for, there is no country in human history that has demonstrated that it is feasible for any society to borrow its way indefinitely to achieve sustainable prosperity. Ultimately, there is only one taxpayer and source of tax revenue for the state – the productive output from people in that society. No one has yet discovered a magical money tree.
At the risk of stating the obvious, Canadians are now all acutely aware that the public budget will not balance itself, and the public debt will not pay off itself. According to Statistics Canada, gross public debt which comprises debt at all levels of government, now exceed $3.3 Trillion dollars. For every 1% in interest rate, each trillion dollars in outstanding debt requires $10 billion in annual interest servicing costs. Today, the Bank of Canada policy interest rate is 4.5%. The arithmetic isn’t difficult, but the financial consequences create hardship on Canadians, because every dollar in interest servicing costs is one less dollar to fund important public services like healthcare, retirement benefits, and education, as well as existential priorities like decarbonization of our economy. This mounting fiscal challenge is exacerbated by the fact that every extra dollar that we add to our outstanding public debt increases the ongoing interest cost to service that debt.
Economics may be the dismal science, but policy decisions that aren't rooted in sound economics will likely lead to dismal outcomes for Canada.
Ernest Lang is the principal and CEO of Promerita Group.
