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Who Will Pay for the Economic Lockdown?
by John Lester

Series:Commentary No. 594
ISBN 9781989483602
Publication year: 2021

Cdn: $12.00; US: $12.00
Paperback
Language: English
26 pages
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Generational fairness is key in paying for the estimated $550 billion in added debt Ottawa has run up fighting the pandemic, says a new report from the C.D. Howe Institute.

In Who Will Pay for the Economic Lockdown? author John Lester argues someone will have to pick up the tab for the cost of the lockdown, and rolling over the debt indefinitely leaves future generations on the hook, which hardly seems fair given that the benefits are limited to Canadians alive now.

The report demonstrates that federal debt-financed income support policies have almost fully offset the overall income loss from the lockdown-induced recession, but also estimates that federal debt is likely to be about $550 billion higher as a result. Most of the current discussion around this additional debt focusses on its sustainability – whether the debt can be rolled over indefinitely without requiring tax increases or spending cuts to finance the interest expense. Silence on the economic cost of the debt suggests a lack of concern about its economic impact. However, the analysis in this paper indicates that the income loss arising from the recession can only be deferred, not eliminated, by issuing debt because debt weighs on economic performance over time. The author further argues that fairness requires that the lockdown-induced increase in debt be retired before the next generation starts working and paying taxes, which will occur 18 to 25 years from now.

"There seems to be a view among many politicians and economists that the additional debt can be rolled over indefinitely without an economic cost," said Lester. "While a free lunch is a theoretical possibility, as a practical matter someone has to pay the cost of the economic lockdown, and that should be the generation that benefits from it."

A second fairness issue is how the recession-induced output loss should be shared among the current generation. The report argues government needs to implement a set of debt reduction policies that, given the distribution of income losses during the recession, achieves a fair sharing of the burden of the recession.

The report offers recommendations for a fair and efficient debt-repayment policy:
  • Since they harm rather than help long-run economic performance, eliminating business subsidies that do not address a clearly defined market failure should be the centrepiece of a debt-reduction strategy.
  • Spending reductions that promote a fairer distribution of the economic cost of the recession without harming economic efficiency should also be considered. For example, retirement income has not been directly affected by the lockdown, so it may be reasonable to ask retirees with income above a threshold to make an extra contribution to paying down the debt.
  • If revenue-raising measures are necessary, tax increases on business investment should be avoided. In a small economy like Canada, corporate income taxes result in less investment, which leads to lower productivity and lower wages. The corporate income tax is effectively a tax on wages but is much more damaging than increases in personal income taxes or the GST, because it causes a fall in wages.
Paying down the debt fairly and efficiently raises complex technical issues and value judgements that should be debated publicly. To help guide the way, the government should set up a Parliamentary Committee to consult with Canadians on who should pay for the economic lockdown and, with the assistance of an expert panel, to develop a proposal for repaying the debt in the most efficient way.

John Lester is an Executive Fellow at the School of Public Policy, University of Calgary.
Who Will Pay for the Economic Lockdown?
Cdn: $12.00; US: $12.00
C.D. Howe Institute / Institut C.D. Howe BookID: 128351 Added: 2021.3.28